Global Credit Research - 31 Oct 2012

Transcription

1 Rating Action: Moody's assigns definitive ratings to French RMBS Class A Bonds and affirms ratings to existing Class A Bonds issued by CIF ASSETS , a compartment of the Fonds Commun de Titrisation CIF ASSETS Global Credit Research - 31 Oct 2012 EUR 21 Billion of debt securities affected London, 31 October Moody's assigns definitive ratings to French RMBS Class A Bonds and affirms ratings to existing Class A Bonds issued by CIF ASSETS , a compartment of the Fonds Commun de Titrisation CIF ASSETS:...EUR19,321.5M Class A existing Notes, Affirmed Aaa (sf)...eur1,669.1m Class A newly-issued notes, Assigned Aaa (sf) RATINGS RATIONALE The ratings take into account the credit quality of the underlying mortgage loan pool, from which Moody's determined the MILAN Credit Enhancement and the portfolio expected loss, as well as the transaction structure and any legal considerations as assessed in Moody's cash flow analysis. The portfolio consists of French prime residential home loans backed by first economic lien mortgages or equivalent third-party eligible guarantees. This rating action relates to the tap issuance of EUR 1,669.1 million of new Units that are fungible with existing ones. The total outstanding debt issued by CIF ASSETS will amount to EUR 24,826.9 million. The portfolio is serviced by 11 current regional lenders of the CIF group. The transaction is arranged, originated and serviced by the CIF group. On 28 August 2012, Moody's downgraded 3 CIF from A1/P-1 to Baa1/P-2, direction uncertain. The French Ministry of Finance subsequently announced on 1 September 2012 that the French government would provide a guarantee to the CIF group with the aim of allowing it to meet all of its obligations ("the State Guarantee"). On 28 September 2012, the Ministry of Finance published the draft finance bill for 2013 (Projet de Loi de Finances pour 2013, the "Draft Finance Bill") which set outs the main features of the State Guarantee. The guarantee would encompass: (1) receivables of the issuer from 3 CIF in the form of securities or deposits (including the reserve fund, the specific reserve funds and the floating rate receivable by the issuer under the swap) for a total amount of EUR 12 billion (such amount also being destined to cover the CIF Euromortgage covered bond transaction) and (2) new issuance of unsecured debt by 3 CIF for a maximum amount of EUR 16 billion. In particular, the grant of the State Guarantee will be conditional upon the CIF group ceasing their lending activities. On 25 October 2012, Moody's further downgraded 3 CIF to Baa2/P-2, on review for downgrade. The downgrade of 3 CIF has resulted in trigger breaches under certain agreements in the RMBS transaction. In response to the trigger breaches, 3 CIF and Eurotitrisation, in its capacity as the management company for the RMBS transaction, entered into a waiver agreement on 10 September 2012 (the "Waiver Agreement"). Through the Waiver Agreement, the management company has agreed to (1) release 3 CIF from its obligations to (i) post collateral under the swap agreement and (ii) transfer the specific reserve funds to a P-1 rated entity under the terms of the RMBS transaction, and to (2) allow the amounts standing to the credit of the issuer account (including the reserve fund) held with Société Générale (A2/Prime-1) to keep being invested in 3 CIF term deposits, in each case until the earlier of (1) 28 February 2013 and (2) the date on which the State Guarantee becomes effective. The key considerations that the financial deterioration of the CIF group poses for the transaction, in particular the provision of ongoing servicing and the aforementioned waivers of 3 CIF's contractual obligations, have been fully reassessed in the frame of this tap issuance. In order to mitigate the increased operational risk entailed by the deterioration of the 3 CIF's creditworthiness, the structure benefits from (i) the management company acting as back-up servicer facilitator, (ii) a trigger to appoint a

2 structure benefits from (i) the management company acting as back-up servicer facilitator, (ii) a trigger to appoint a back-up servicer should the rating of the CIF group fall below Baa3, (iii) the availability of the specific reserve funds - sized at 3% of the outstanding balance of Class A notes plus 0.30% of all outstanding loans - during the transaction's lifetime to cover potential shortfalls on senior fees and Class A notes interest in the event of a servicer disruption and (iv) the expected high level of support from the French government through the State Guarantee. In particular, based on the Draft Finance Bill, Moody's believes at this stage that the specific reserve funds will fall within the scope of the State Guarantee and that consequently the risk of a payment disruption on the Class A notes due to the non-performance of a or several regional servicers is covered by the funds. The CIF group also provides the swap through the 3CIF entity. The swap mitigates the interest rate risk relating to the fixed rate loans which represent 39.7% of the pool and to the basis risk related to the floating rate loans that represent 53.3% and guarantees a 1.6% margin. In light of the recent deterioration of the 3 CIF's financial position, Moody's has tested the resilience of the structure and assessed the linkage of the ratings of the Class A notes to that of 3 CIF by running a sensitivity scenario assuming there is no swap in the transaction. The structure also benefits from a non-amortising cash reserve - that will be fully funded at closing to 4.75% of the initial balance of the notes -, from a principal to pay interest mechanism and from accelerated amortisation triggers. The expected portfolio loss of 2.5% and the MILAN required credit enhancement of 13.7% serve as input parameters for Moody's cash flow and tranching model, which is based on a probabilistic lognormal distribution as described in the report "The Lognormal Method Applied to ABS Analysis", published in July The key drivers for Milan Credit Enhancement number are (i) the relatively high weighted average current loan-to value ratio of 82.15%, (ii) the potential deterioration in the quality of servicing in the short to medium term due to the transaction risks associated with the run-off scenario contemplated by the French government, (iii) the relatively high proportion of riskier products such as buy to let (17.1%), unsecured loans benefiting from a guarantee (18.8%) or not (EDF-GDF loans, 0.8%), and loans to non-resident borrowers (2.4%) and (iv) the potential drift in asset quality since new mortgage loans will be added to the pool on the interest payment date falling in January 2013, with the amount of substitutions being capped at EUR 800 million, i.e. approximately 3.1% of the closing pool. The key drivers for the portfolio expected loss are (i) the collateral performance of CIF; (ii) as emphasised above with regards to the Milan Credit Enhancement number, the potential deterioration in the quality of servicing in the short to medium term; (iii) the current macroeconomic environment in France and (iv) benchmarking with similar transactions in the French market. The Moody's cumulative defaults assumption (from 6.4% to 6.0%) is mainly driven by (i) the weaker performance experienced during 2009 by the entire book,(ii) the trend towards higher default level of the most recent vintages and (iii) the potential drift in asset quality through substitutions as described above. In particular, Moody's expects the business continuity uncertainties surrounding the servicing of the portfolio in the frame of the run-off scenario to negatively affect the efficiency of the arrears management and loss mitigation procedures and therefore anticipates a decrease in the recovery rate in the short to medium term to 60%, compared with our previous assumption of 65%. The ratings of the notes address the expected loss posed to investors by the legal final maturity of the Notes. In Moody's opinion, the structure allows for timely payment of interest and ultimate payment of principal at par on or before the final legal maturity date. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors. The V Score for this transaction is Medium, which is higher than the V score assigned for the French RMBS sector. The V Score was positively impacted by the fact that it is a standard French RMBS structure for which we have over 10 years of historical performance data. The V Score was however negatively impacted primarily by the financial deterioration of the CIF group (including the maintenance of its ratings on review with direction uncertain) and the relative uncertainty in the transaction associated with the scope and/or time horizon of the State Guarantee. The secondary source of uncertainty surrounding our assumptions is the current macroeconomic environment, in which property values might be falling and unemployment might continue to rise. The V-Score has been assigned accordingly to the report "V-Scores and Parameter Sensitivities in the Major EMEA RMBS Sectors" published in April V Scores are a relative assessment of the quality of available credit information and of the degree of dependence on various assumptions used in determining the rating. High variability in key assumptions could expose a rating to more likelihood of rating changes. Moody's Parameter Sensitivities: if the portfolio expected loss was increased to 7.5%, the model output indicates that Class A would still achieve Aaa assuming that MILAN Aaa Credit Enhancement increases up to 16.4% and all other factors remain equal. If the MILAN Aaa Credit Enhancement would be stressed by 1.6 times to 23.7%, the model output for the class A notes would be Aa1, assuming an expected loss of 2.5%.

3 Moody's Parameter Sensitivities provide a quantitative/model-indicated calculation of the number of rating notches that a Moody's structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged and is not intended to measure how the rating of the security might migrate over time, but rather how the initial rating of the security might have differed if key rating input parameters were varied. Parameter Sensitivities for the typical EMEA RMBS transaction are calculated by stressing key variable inputs in Moody's primary rating model. The principal methodology used in this rating was Moody's Approach to Rating RMBS in Europe, Middle East, and Africa published in June Please see the Credit Policy page on for a copy of this methodology. In rating this transaction, Moody's used ABSROM to model the cash flows and determine the loss for each tranche. The cash flow model evaluates all default scenarios that are then weighted considering the probabilities of the lognormal distribution assumed for the portfolio default rate. In each default scenario, the corresponding loss for each class of notes is calculated given the incoming cash flows from the assets and the outgoing payments to third parties and noteholders. Therefore, the expected loss or EL for each tranche is the sum product of (i) the probability of occurrence of each default scenario; and (ii) the loss derived from the cash flow model in each default scenario for each tranche. As such, Moody's analysis encompasses the assessment of stressed scenarios. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure. Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information. Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments in this transaction. Further information on the representations and warranties and enforcement mechanisms available to investors are available on Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating. Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website for further information. Please see the ratings disclosure page on for general disclosure on potential conflicts of interests.

4 Please see the ratings disclosure page on for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter. Please see Moody's Rating Symbols and Definitions on the Rating Process page on for further information on the meaning of each rating category and the definition of default and recovery. Please see ratings tab on the issuer/entity page on for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website for further information. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Emily?Rombeau Associate Analyst Structured Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: SUBSCRIBERS: Michelangelo Margaria VP - Senior Credit Officer Structured Finance Group Telephone: Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: SUBSCRIBERS: Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH

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