Updates to France’s covered bond framework that bring it into line with the EU directive uphold key strengths of the country’s legislation, according to Moody’s, which among the few changes made highlighted the positive implementation of maturity extension triggers.

As a covered bond analyst noted, France’s transposition of the EU Covered Bond Directive came through at the “last second”, with the French government passing the necessary decree on 6 July, two days ahead of the deadline for transposition. This made it the last of only four member states to meet the 8 July deadline, alongside Denmark, Germany and Latvia.

Moody’s noted on Monday that France’s framework was already in line with or exceeded most of the minimum standards of the new EU rules, and that in the few areas where changes were required, these have been positive.

“Moreover, where France’s previous law exceeded the minimum EU standards, French legislators upheld the stronger standards rather than lower them to the minimum level,” the rating agency added.

A key addition to French legislation is the definition of objective triggers for maturity extensions that prevent unnecessary extensions at an issuer’s discretion.

According to Moody’s, the new French law allows covered bond maturity extensions if: issuers or sponsor banks fall into insolvency or resolution; or on the decision of France’s prudential regulation authority (Autorité de contrôle prudentiel et de résolution, ACPR) if issuers breach the 180 day liquidity coverage requirements for covered bonds.

“The first trigger is objective and verifiable, which is positive because it should prevent parties from challenging or denying extensions and avoid delays before issuers or administrators can extend,” said Moody’s. “This trigger will also prevent premature extension.

“The second trigger meets the EU’s objectivity rule by outsourcing the extension decision to ACPR. The law’s requirement for ACPR consent could raise risks around timing and predictability for extensions, given that the ACPR’s mandate to act would not necessarily align with covered bondholders’ best interests. However, we expect the regulator will be mindful of the consequences, for both the issuer and the important covered bond market in general, of allowing or denying extensions.”

An idiosyncrasy of the French market is the prevalence in of guaranteed home loans (prêts cautionnés) and Moody’s noted that the new law introduces for the first time, minimum credit quality requirements for residential loan guarantors. They will have to comply with EU credit step quality 2, corresponding to a rating of at least A3 or A-.

Concurrently, a 35% cap on the cover pool share of guaranteed home loans in obligations foncières issued by sociétés de crédit foncier (SCFs) has been removed.

“This will have the effect of aligning the two French covered bond regimes on this point,” said Moody’s. “There will be mixed credit implications depending on the credit quality of guarantors, now that they could play a bigger role in determining asset quality.

“In practice the impact will be limited, because usually guaranteed home loans represent much less than 35% of SCF cover pools.”

Transparency requirements have been brought into line with the directive and the new law introduces the relevant terms “obligation garantie européenne” (European Covered Bond) and “obligation garantie européenne de qualité supérieure” (European Covered Bond (Premium)).