October 4, (30,3 USD, -0,92%) placed on review for downgrade the Aaa ratings of the public-sector covered bonds (Obligations Foncieres) issued by (1,08 EUR, 5,48%) Municipal Agency (DMA). DMA is the financing vehicle (legally owned by CLF France) used to issue covered bonds for the Group.
rating action is a consequence of placing Crédit Local senior unsecured and short-term ratings (currently A3/P-1) on review for downgrade.
DMA reminds that the quality of its portfolio (the cover pool) and the legal protection conferred to investors and swap counterparties provide very strong protection. DMA is well capitalized with a solvency ratio (Tier 1) in excess of 30%. Commitments were over-collateralized by 17% in June and September 2011).
The “Obligations Foncieres” (OF) and hedging swaps benefit from the same legal privilege, that is:
- Asset cash-flows are dedicated to the payment of the privileged creditors with a seniority over the other creditors;
-There is no early redemption or accelerations of payment: in all cases, the OF contractual redemption schedules are maintained.
DMA has ample access to liquidity, even when markets are closed, thanks to:
- A direct access to interbank and ECB repo;
- A large amount of assets directly eligible for refinancing by the central bank with a low haircut
Our View:
Within the Group scenarios that are circulating, the French would like to keep DMA as financing vehicle needed to issue covered bonds, because DMA (for the time being) is triple-A rated,which is key for that kind of business. The French government would create a “new public finance” bank together with Banque Postale and CDC.
Conclusion:
We maintain our Hold rating and € 2 target price which could however change materially pending the outcome of the negotiations between the Board and the Belgiand and French Government about the future of the Group.