Amendments to France’s covered bond framework passed by the French parliament on Tuesday will be credit positive for covered bonds of obligations foncières issuers who make use of a collateralised loan structure newly-available to them instead of transferring mortgages, Moody’s said today (Monday).

The new option for certain French issuers is introduced under an alignment of the two main French covered bond regimes, that of sociétés de crédit foncier (SCFs), which issue obligations foncières, and that of sociétés de financement de l’habitat (SFHs), which issue obligations à l’habitat.

According to Moody’s, the amendment allows SCF issuers to now use a collateralised loan structure whereby the mortgage receivables in the cover pool collateralise a loan from the covered bond issuer to its sponsor. Under French law, this achieves the same level of isolation of the cover pool from the insolvency estate of the sponsor as an outright sale of the mortgage loans.

“Compared to a sale of the mortgage loans, the collateralised loan structure provides a better level of recourse against the sponsor (typically the issuer’s parent), as well as making it easier for the sponsor to support the covered bonds by removing loans in arrears or in default,” said the rating agency. “This is credit positive for the covered bonds of SCF issuers that adopt the collateralised loan structure.”

Moody’s noted that the covered bonds of three issuers who currently use a sale structure – Axa Bank Europe, Caffil and CIF Euromortgage – are not considered to benefit from a claim against the sponsor upon default.

“Two of them, Axa Bank Europe SCF and CIF Euromortgage, must restructure their cover pools before the end of 2017 because they contain securitisation notes that will no longer be eligible cover pool assets,” it added. “The collateralised loan structure is therefore a new available option for them.”

Following the alignment of the two French regimes, the main remaining difference is their eligible assets, Moody’s said, with SFH’s covered bonds backed only by residential loans but SCFs’ able to be backed by residential or commercial mortgage loans and/or public sector debt.

“The alignment is also in keeping with the more general debate initiated last year by the European Commission on the harmonisation of European covered bond legal frameworks,” it added.

The change is included in a law known as “Sapin II” that includes a wider package of financial measures as well as transparency and anti-corruption initiatives.

Photo: French minister of economy and finance Michel Sapin; Credit: Ministère de l’Economie et des Finances/Wikimedia Commons