A law that came into effect last Wednesday that limits legal risk arising from invalid interest rate clauses in structured loans granted to French local authorities is credit positive for French credit institutions and covered bond programmes that acquired such loans, particularly SFIL and Caffil, Moody’s said today (Monday).

In February 2013 a Nanterre court ruled against Société de Financement Local (SFIL) predecessor Dexia Crédit Local in a case involving this type of loan. According to the rating agency, 206 court cases were pending as of the end of March, with SFIL’s covered bond issuer, Caisse Française de Financement Local (Caffil), citing related provisions at the end of 2013 of Eu66m.

Moody’s said that the law that came into effect last Wednesday will end most of the current legal proceedings. It said the law is credit positive because it will allow Caffil to avoid significant losses on interest payments on its cover pool and will reduce the likelihood of a payment disruption on its covered bonds in the event of SFIL’s default.

“The law excludes or limits the potential interest claims from local authorities in situations where the local authorities, as borrowers, were entitled to avoid payment of contractual interest and pay only the legal interest rate because of a late or erroneous disclosure of the effective global interest rate (the TEG),” said the rating agency.

Moody’s had in September 2013 flagged the possible positive outcome after reviewing the draft law.

“While this is not unexpected, it is still very positive from a fundamental perspective,” said a covered bond analyst this morning.

Photo: Palais de Justice de Nanterre