Analysts expect pressure on the ratings of French covered bonds to rise, with many public sector backed issues facing downgrades, after Standard & Poor’s cut France’s rating from AA+ to AA, stable, this (Friday) morning.

According to Florian Eichert, senior covered bond analyst at Crédit Agricole, French mortgage backed covered bonds should be unaffected because they can be rated up to six notches above the sovereign. However, he said that, with uplift limited to one notch above the sovereign for covered bonds with public sector exposure and ratings therefore capped at AA+, several public sector obligations programmes could be downgraded.

The combination of methodology and France downgrade to AA most directly affects the obligations foncières programme of Crédit Mutuel Arkea, which according to Eichert is the only one to have a cover pool comprising 100% French exposure. He said that S&P’s methodology for mixed country exposures implies that the public sector covered bond programmes of Caffil, Credit Agricole and Société Générale will be downgraded, although BNP Paribas could retain its programme’s AAA rating by adding only a little AA+ or better rated exposure to its cover pool given its amount of OC and that only 29% is French exposure.

“For all of the others, maintaining a AAA would require very significant pool rebalancing,” he added, “and considering the fact that a downgrade to AA+ will in itself hardly have a spread impact it’s not really worth it.”

Eichert does not expect a proposed change to S&P’s rating methodology regarding sovereign caps to have an impact on the public sector covered bonds and said that a potential reduction in uplift for mortgage programmes to two notches should not preclude AAA ratings.

However, Bernd Volk, head of covered bond research at Deutsche Bank, noted risks arising from negative outlooks on most French bank ratings. He was nevertheless sanguine about any spread impact.

“Even if there were to be a downgrade (with downgrade risk higher in the case of hard bullet issues), we doubt that it would have a significant impact,” he said. “Numerous double-A rated Pfandbriefe trade significantly tighter than AAA French covered bonds”.

Eichert, meanwhile, noted that S&P has confirmed that the French downgrade is a “non-event” for obligations foncieres of Compagnie de Financement Foncier, which are backed by a mix of public sector and mortgage assets, given how the rating agency treats the programme.