The French government has published a decree amending the legal framework for obligations foncières (OF) and obligations de financement de l’habitat (OH), which Fitch said involves four key changes and is credit positive although some of its goals may not be fully met.

The changes to the legal framework for OFs and OHs were flagged by a Banque de France official at a European Covered Bond Council plenary in Paris in April, with the decree – dated Friday, 23 May and the responsibility of the finance ministry – setting out the details. The decree entered into force on Monday.

The decree has as its overarching goal to improve the regulatory regime for secured obligations, which includes making OF and OH issuers – sociétés de crédit foncier (SCFs) and sociétés de financement de l’habitat (SFHs) – more resilient to an insolvency of their parent entity by limiting their exposure to the sponsor bank and reinforce their liquidity.

Cristina Costa, senior covered bond analyst at Société Générale, said that the changes are as expected after they were first flagged at the ECBC plenary.

“There aren’t any surprises,” she said.

The decree nevertheless fleshes out the brief information provided by the Banque de France official, and Costa, for example, noted that the decree, inter alia, sets out details about how overcollateralisation has to be calculated and exposure to sponsor banks is to be limited.

Fitch yesterday (Wednesday) said that there are four key changes: an increase in legal minimum overcollateralisation from 102% on a nominal basis to 105%; restrictions on asset-liability maturity mismatches; a cap on intragroup exposure; and a requirement for SCFs and SFHs to prepare living wills.

The decree is also understood to make changes to criteria governing substitution assets and to introduce a requirement that issuers, to the extent that they breach a 10% limit on the amount of outstandings that eligible securitisation tranches can comprise, submit to the French banking regulator a plan setting out how they intend to comply with this limit by the end of 2017, when a waiver from the 10% limit expires.

Fitch said it will assess any potential ratings impact from the amendments on a programme-by-programme basis.

The higher minimum OC requirement is credit positive, said the rating agency, but would still not cover credit losses and asset and liability mismatches in most rating scenarios.

“Our assessment will therefore continue to place more weight on commitments of issuers to maintain OC above breakeven levels, currently ranging between 5.2% and 38.9%, which Fitch deems compatible with covered bond ratings,” it said.

Another change, according to Fitch, is that from 2016 the weighted average life (WAL) of assets should not exceed the WAL of liabilities by 18 months, although this provision only applies up to the minimum legal OC of 105%.

“This should result in lower asset and liability mismatches and could lead to a reduction in the level of OC compatible with the different rating scenarios,” said the rating agency.

Intragroup exposure has been capped at 25% of non-privileged resources in another change, and it is no longer possible to meet an existing six month liquidity requirement with an intragroup liquidity line, according to Fitch.

It said this would encourage diversification, but may not reduce exposure to the parent as much as intended.

“This is because it is still possible to cover a liquidity gap with secured loans or promissory notes, which are not considered as an exposure to the parent under the revised framework,” said the rating agency. “In Fitch’s opinion, although this would improve the recovery prospects for the SCF or SFH in a parent insolvency by making them a secured creditor, it may not provide the programme with immediate liquidity when needed, depending on the nature of the security.”

The other key change is that SCFs and SFHs will have to prepare living wills that identify the employees and systems required to run the issuers on a standalone basis if the parent were insolvent, which Fitch said could “reinforce the comfort we take from cover pool-specific alternative management provisions as a component of our Discontinuity Cap”.