This presale report is based on information as of March 1, 2005. The credit ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final credit ratings that differ from the preliminary credit ratings. For further ratings information, call one of the following Standard & Poor's numbers: London Client Support Desk (44) 20-7176-7400; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5916; or Moscow (7) 095-783-4017. Members of the media may also contact the European Press Office via e-mail on: media_europe@standardandpoors.com. Investors are invited to call the SF Investor Hotline on (44) 20-7176-3223.
Class
Prelim. rating*
Prelim. amount (Mil. €)
Available credit support (%)
Interest
Optional call date
Legal final maturity
A+
AAA
0.25
8.00
Three-month EURIBOR plus a margin
December 2009**
December 2043
A
AAA
0.25
4.00
Three-month EURIBOR plus a margin
December 2009**
December 2043
B
AA
0.25
2.35
Three-month EURIBOR plus a margin
December 2009**
December 2043
C
A
26
1.70
Three-month EURIBOR plus a margin
December 2009**
December 2043
D
BBB
42
0.65
Three-month EURIBOR plus a margin
December 2009**
December 2043
*The rating on each class of securities is preliminary as of March 1, 2005 and is subject to change at any time. Final credit ratings are expected to be assigned on the closing date subject to a satisfactory review of the transaction documents and legal opinion, and completion of a corporate overview. Standard & Poor's ratings address timely interest and ultimate principal.
**And any subsequent payment date.
Transaction Profile
Expected closing date
March 2005
Originator
Crédit Logement
Arranger
Calyon
Seller/protection buyer
Crédit Logement
Security trustee
The London branch of Bank of New York, NY
Note trustee
The London branch of Bank of New York, NY
SPE administrator
AIB International Financial Services Ltd.
Repurchase counterparty
Calyon
Transaction account provider
Allied Irish Banks PLC
Supporting Ratings
Institution/role
Ratings
Calyon as repurchase counterparty and custodian
AA-/Stable/A-1+
Allied Irish Banks PLC as transaction account provider
A/Positive/A-1
Crédit Logement as protection buyer
AA/Stable/—
Transaction Key Features
Reference portfolio
Guarantees covering unsecured residential loans granted to individuals by lending banks
Collateral
Euro-denominated government bonds rated at least 'AA-'
Principal outstanding (€)
4,000,065,540
Country of origination
France
Concentration
Diversified, but replenishments could lead to higher concentration levels in the Paris area (cap restriction at 55%), in Provence Alpes Côte d'Azur (12%), in Rhône-Alpes (12%), and in each of the other regions (10%)
Property occupancy
All owner-occupied primary (more than or equal to 95% of portfolio) or secondary residence (maximum 5%)
Loan interest rate
Mainly fixed-rate loans. Floating-rate loans allowed up to 8% of the portfolio
Weighted-average LTV ratio
63.04% at closing (following replenishments, maximum 63.50% until end of fourth reference period, 62.50% until the end of the eighth reference period, and 62.00% thereafter)
Average loan size balance (€)
63,389
Maximum loan size (€)
400,000 in Ile de France (including Paris) and 200,000 elsewhere
Weighted-average seasoning (months)
29
Weighted-average asset life remaining (years)
12.9
Weighted-average loan interest rate at the time of origination (%)
4.67
Weighted-average liability interest rate
N/A
Arrears
None
Redemption profile
N/A
Excess spread at closing
N/A
Cash reserve
N/A
Liquidity facility
N/A
Substitution period (years)
4.75
Prefunding period (months)
N/A
Mortgage priority
Mortgage on property taken upon default. First or second-ranking mortgage
Maximum initial LTV ratio (%)
100
Principal deficiency ledger
N/A
Tap provision
N/A
Available funds cap
N/A
Transaction Summary
Preliminary credit ratings have been assigned to the €68.75 million floating-rate notes to be issued by French Residential Asset 2005-1 PLC, an Irish SPE.
The originator of the transaction is Crédit Logement (AA/Stable/—), the main residential loan guarantee provider in France and provider of guarantees for loans originated by major French banks. Crédit Logement is selling to third parties the credit risk on a €4 billion reference portfolio of guarantees on residential loans.
To do this, it will enter into senior credit default swaps with OECD banks. In addition, it will enter into a junior credit default swap with the issuer, French Residential Asset 2005-1, under which it will receive protection payments if losses exceed a threshold. In exchange for this, the issuer will be paid a premium.
Notable Features
This is the fourth public securitization of assets originated by Crédit Logement following two similar issuances in 2004 (together referencing approximately €8 billion of guarantees), and Hexahome, a privately placed transaction, completed in December 2004 (referencing another €3.5 billion of assets). The assets in the reference portfolio are not residential loans but guarantees covering losses on the principal portion of those loans.
A recent major trend in the French residential loan market is for banks increasingly to use guarantees to secure their loans as opposed to taking a mortgage on the property being financed. In 2003, about 51% of all residential loans were secured by guarantees compared with 41% by mortgages.
Strengths, Concerns, And Mitigating Factors
Strengths
The originator has a strong originating and recovery process.
The characteristics of the guaranteed loans that make up the portfolio are typical of standard residential loans in the French market, with no particular feature of concern, such as with regard to LTV ratio, loan size, or amortization profile. All financed properties are owner-occupied.
Each credit event is audited by an independent third party once losses reach 70% of the initial threshold amount.
The cash flow mechanics and structure of the transaction are considered sound.
Concerns
Crédit Logement does not take a mortgage on the financed property immediately upon the guarantee being granted, but only upon the occurrence of a credit deterioration, including a credit event.
There is no independent verification process of credit events, eligibility criteria, servicing standards, and write-offs. However, when losses reach 70% of the threshold amount, a third-party auditor will verify the occurrence of all past credit events — on the basis of a sample analysis — and verify any subsequent credit events.
On the occurrence of a credit event, and before any amount of recovery is known, a provisional loss amount will be registered, depending on the LTV ratio of the corresponding loan, and, if the threshold has been exhausted, the corresponding amount will be paid as cash settlement to Crédit Logement and the notes accordingly written down.
The transaction provides for a reinstatement mechanism for the written-down amounts if realized recoveries are eventually higher than expected, but this relies on a payment to be made by Crédit Logement and no interest will be paid to investors on this reinstated amount for the period during which it had been written down.
The reference portfolio is revolving and the credit quality of the portfolio may therefore deteriorate over time.
The transaction relies on the repurchase (repo) counterparty and Crédit Logement for the payment of interest on the notes.
The replenishment amount is based on the scheduled amortization and prepayment amounts.
Mitigating Factors
An eligibility criterion for the assets being financed is that Crédit Logement guarantees all the loans granted to finance the property, thereby limiting the risk that other creditors may have taken a prior-ranking mortgage on the financed property.
Crédit Logement has long experience in managing borrower default. Borrowers who have historically found it more difficult to obtain first-ranking mortgages (self employed and individual companies in particular) are excluded from the securitization.
Any sample analysis of past credit events will be conducted with a level of confidence that is consistent with the ratings on the notes, and no further losses will be accounted for until the auditing process has been completed. If conclusions on the sample are not satisfactory, all credit events, eligibility criteria, and servicing standards will be independently reviewed for each credit event declaration.
Credit enhancement in the transaction has been sized to consider the provisional write-down, if any, on any defaulted asset, as a minimum loss amount.
Standard & Poor's has not assumed any reimbursement by Crédit Logement of cash settlement amounts provisionally paid in excess of realized losses.
Substitutions, which are limited to a 4.75-year replenishment period and subject to a rotation trigger of 85% and a cumulative default trigger of 0.25%, will be subject to testing that credit enhancement is sufficient given the new profile of the portfolio, using Standard & Poor's credit model for RMBS transactions.
Premium payments under the credit default swap will be made quarterly in advance and the transaction will be terminated early should the repo counterparty be downgraded below 'A-1+' and not replaced within 30 days.
Crédit Logement is only informed of delinquencies upon the third unpaid installment and may not be aware of any unscheduled prepayments. It is likely to result in an overstatement of the guaranteed amount. Standard & Poor's did not give any credit to this implicit enhancement.
Transaction Structure
To fund its obligations under the credit default swap, French Residential Asset 2005-1 will issue €68.75 million of floating-rate notes (see chart below). The proceeds of the issuance will be invested in securities (euro-denominated government bonds rated at least 'AA-').
The issuer will also enter into a repo agreement with Calyon (AA-/Stable/A-1+) to protect the transaction against market risk. The issuer will pay the interest due on the notes using the premium it receives under the credit default swap and the interest component of the repurchase price paid by the repo counterparty.
On a junior swap cash settlement amount being payable by the issuer to Crédit Logement under the credit default swap, the issuer will liquidate enough securities to pay the credit protection buyer. The principal amount of the notes will be written down accordingly, starting with the most junior class of notes.
At the end of the 4.75-year revolving period, any repayment on the loans that underlie the reference assets will give rise to a corresponding amortization of the notes, starting with the most senior class of notes. The class A+, A, and B notes will be respectively pari passu with unfunded liability tranches in terms of both amortization, allocation of losses, and allocation of principal reinstatement. As a result, the unfunded portion of each tranche contributes to the credit enhancement of the more senior tranches, even though no notes are actually issued against those unfunded portions.
A termination of one of the unfunded credit default swaps (other than optional) would result in full redemption of the class A+, A, and B notes, so as to avoid any impact of a counterparty default on the credit protection provided to the noteholders.
In case of an optional termination of one of the senior credit default swaps, the corresponding class of notes will be redeemed in full, along with any notes senior thereto.
Roles Of The Parties
French Residential Asset 2005-1 PLC (Issuer)
French Residential Asset 2005-1 was incorporated in December 2004 as a limited liability company under the laws of Ireland. Its whole share capital is held by three charitable trusts. It is expected to meet Standard & Poor's bankruptcy remoteness criteria at closing. These include signing up to covenants limiting its activity, indebtedness, and capacity to merge, sell, and acquire assets outside the scope of this transaction.
Crédit Logement (Originator And Credit Protection Buyer)
Crédit Logement is a financial institution that provides guarantees for banks' residential-property loans granted to individuals. These guarantees are offered as an alternative to the traditional mortgage product that is secured on a property. With this dedicated activity, Crédit Logement is a leader in the guarantee market with a market share in 2004 of approximately 45%.
Since Aug. 2, 1999, Crédit Logement has been jointly owned by a group that includes nearly all the large French banks, with the three largest shareholders being Crédit Agricole / Crédit Lyonnais (33%), as well as Société Générale and BNP Paribas, each of which holds 16.5% of Crédit Logement's capital. Crédit Logement's commercial development is helped by its joint ownership by these banks, which provide a flow of business and reinforce the company's role in catering exclusively to the French banking system as a guarantor of bank-generated housing loans.
The development of Crédit Logement's business has benefited from a steady decline in mortgages being used as collateral for housing loans in France (mainly for cost reasons). Banks are increasingly securing their residential property loans with guarantees from Crédit Logement. Outstanding guarantees progressed at a substantial pace in 2002, 2003, and 2004, with a respective increase of 25%, 29%, and 28% and total outstandings equal to €74 billion as of Dec. 31, 2004.
Crédit Logement has its own criteria for guaranteeing loans and its own credit analysis process, which uses the information gathered by the lending banks.
Although credit and loan management policies may differ between each lending bank and between the lending banks and Crédit Logement, Crédit Logement applies its own criteria and guidelines when approving a guarantee and when managing delinquent loans.
Crédit Logement's acknowledged expertise in the management of delinquent loans and its recovery process has led it to develop its management activity for third-party non-guaranteed loans.
Deloitte & Associés (Verification Agent)
The verification agent will validate quarterly the servicing report provided by Crédit Logement. From the calculation date on which the outstanding threshold amount falls below 30% of the initial threshold, the verification agent will also verify (i) the credit events already confirmed by Crédit Logement on the basis of a sample, and (ii) all new credit events as well as the eligibility criteria and the servicing standard regarding these guarantees. If the results relative to the sample are not satisfactory, the verification agent will verify all the credit events that have occurred since the beginning of the transaction.
Mechanism Of The Guarantee
The mechanism of the guarantee is based on the contract signed between Crédit Logement and the partnering banks. In exchange for an indemnity that covers unpaid installments, outstanding principal, and exceptional expenses, the borrower pays a financial contribution that covers the remuneration of Crédit Logement and a contribution to a mutual guarantee fund. In addition to the costs and flexibility that the guarantee offers, the attractiveness of the guarantee over the mortgage results also from a partial retrocession of the mutual guarantee fund contribution to the borrower when the underlying loan is fully repaid, depending on the overall performance of Crédit Logement's total portfolio.
Reference Portfolio Description
Key features of the initial reference portfolio are illustrated in charts 2 to 4.
At closing, the portfolio is expected to comprise 63,103 guaranteed loans, for a total amount of €4 billion, and have an average LTV ratio of 63.04%, an average debt-to-income ratio of 26.79%, and an average seasoning of 29 months. The cut-off date for the initial portfolio was Dec. 31, 2004.
The loans will finance owner-occupied loans only, throughout metropolitan France.
The portfolio is similar to that securitized through the various transactions completed in 2004, but in addition, will also include a small bucket of floating-rate loans.
One point of interest is that the asset to be securitized — i.e., Crédit Logement's exposure as guarantor of those loans — will not be further secured by a mortgage on a financed property.
However, Crédit Logement, as servicer of the reference portfolio, will be in line with its standard procedures. Standard & Poor's has reviewed those procedures and the historical data provided, which show that in most cases, a first-ranking mortgage is obtained when necessary. The loans for which it has statistically been more difficult for Crédit Logement to obtain a first-ranking mortgage (mainly loans to professionals and small businesses) will be excluded from the transaction. Loans for which Crédit Logement is not guaranteeing the whole financing amount relating to a given financed property will also be excluded.
Credit Default Swap
Credit events under the credit default swap are:
Failure to pay (corresponding to a default "déchéance du terme", under Crédit Logement's policy usually after six unpaid installments);
Bankruptcy (overindebtedness of the borrowers); and
Restructuring (if the lending bank writes off any amount of principal or interest on a loan with the consent of Crédit Logement).
If there is a credit event, subject to a verification process (see below), a provisional loss will be taken. It would be sized assuming the property is sold for a price equal to 70% of the acquisition price, to be split pro rata between the various loans financing that property. This value would be compared with the defaulted amount (defined as unpaid principal only) and the extent by which the defaulted amount exceeds this value would constitute a provisional loss.
The appraised loss would be treated as a real loss and therefore use up the threshold amount, which could possibly result in cash settlements being payable and the notes being written down.
If the loan has not been written off by the 11th quarterly payment following the credit event, a supplemental appraisal is made based on a valuation of the property by a third-party real estate expert. Should the resulting appraisal result in a higher loss than that loss already provisioned for, a supplemental loss would be allocated on the 12th quarterly payment date after the credit event. If the valuation results in a lower loss than initially provisioned for, nothing happens.
Once the loan is written off, and the actual amount of recoveries is known, an additional loss would be taken, if appraised losses turned out to be lower than the actual loss.
If the threshold amount is exhausted following allocation of losses (including appraised losses), a cash settlement payment would be made and the principal amount of the notes would be written down accordingly under the loss allocation (see below).
Only once recoveries are actually paid in an amount exceeding expected levels, as derived from the appraised losses on the reference obligations:
A cash settlement reimbursement will become due by the protection buyer for any amount written down in excess on the notes; and
On this payment being received by the issuer, the notes and/or the threshold will be reinstated, starting with the most senior class of notes to the extent of any outstanding principal reduction.
This note reinstatement therefore entirely depends on a payment from the originator. For this reason, Standard & Poor's has not assumed any recovery to be repaid to the noteholders in its analysis (i.e., the rating does not depend on any reinstatement).
Finally, on the loan being written off, an additional loss could be taken if losses recorded before the write-off were underestimated.
Six months before the maturity date of the notes, if there are defaulted reference obligations that have not been written off, two independent parties will provide a final appraisal of the properties concerned. The maturity date is defined as four years after the earlier of the early maturity date and the scheduled maturity date. Assuming assessed recoveries are higher than expected, they will be taken into account to reinstate the notes, even though the recoveries have not actually been received by Crédit Logement.
Allocation Of Losses
Once losses exceed the threshold amount, they will be allocated to:
The class D notes; then
The class C notes; then
Pari passu, the class B notes and the class B credit default swap; then
Pari passu, the class A notes and the class A credit default swap; then
Pari passu, the class A+ notes and the class A+ credit default swap.
Verification Process
Before any amount of loss is taken, it will be verified:
That a credit event has occurred;
That the reference obligation complied with eligibility criteria when selected in the reference portfolio; and
That the reference obligation had been managed according to the servicing standards.
Until losses reach 70% of the initial threshold amount, this verification process will be conducted by the originator on its own.
If 70% of the threshold amount is exceeded:
An independent verification agent, Deloitte & Associés, will retroactively conduct a sample analysis of past credit events. If the auditor is not able to obtain a satisfactory level of confidence based on the sample, it will review each credit event one by one. Should any adjustment need to be made, the threshold amount will be reinstated accordingly.
In parallel, the verification agent will check each new credit event.
Repo Agreement
At closing, the issuer will use the proceeds of the issuance of the notes to acquire eligible securities from the repo counterparty. These will have to be euro-denominated government bonds, from EU states having adopted the euro as lawful currency, and will have to be rated at least 'AA-'.
Should any of the eligible securities be downgraded below 'AA-', the repo counterparty will replace them within 30 days.
On each date on which the issuer is required to make a cash settlement payment under the credit default swap or a note amortization payment, the repo counterparty will repurchase the corresponding amount of security at par.
In addition, before any quarterly payment date, the repo counterparty will pay to the issuer the repo premium equal to EURIBOR minus a margin. On its short-term rating being lowered to 'A-1' or lower, the counterparty will have to find a replacement for itself within 30 days or the transaction will terminate early and the notes will be redeemed in full.
Accounts and Cash Flows
The securities purchased with the proceeds of the notes will be deposited in a securities account, with Calyon as custodian. Proceeds from the liquidation of the securities by the repo counterparty under the repurchase will be used to pay amounts due from cash settlement or note amortization, according to the priority of payments. The securities account will allow cash to be deposited. On a downgrade below 'A-1', the custodian would have to replace itself within 30 days.
The issuer's bank account in Ireland will be held with Allied Irish Banks PLC. The bank account provider is subject to replacement within 30 days on a lowering of the short-term rating on the bank below 'A-1'. The exposure on the issuer's bank account will have to be limited to 20% of the rated note amount at any given time. Any exposure above 20% will need Standard & Poor's rating confirmation after the closing of the transaction. The premium from the junior credit default swap and the price differential from the repo counterparty will be paid into the issuer account in Ireland to be used to pay interest due on the notes and operating expenses.
Security Structure
The issuer will grant an assignment of all its rights under all of the contracts under the transaction to the issuer's account in favor of the trustee for the benefit of all of the secured parties, including the noteholders.
The issuer's bank account in Ireland and the issuer's security account with Calyon will be covered by a first-ranking pledge in favor of the security trustee for itself and on behalf of the secured creditors, including noteholders.
Terms Of The Notes
Scheduled Maturity
The notes are expected to be repaid by the scheduled maturity date in December 2039. If on this date, however, there remain defaulted reference obligations that have not yet been written off in excess of the outstanding threshold, an amount will be retained corresponding to the potential loss that the noteholders could incur on these unsettled defaulted assets.
In any event, the notes will be repaid at their outstanding principal amount by December 2043 (the legal final maturity of the notes), allowing for a four-year recovery period for defaulted loans on the scheduled maturity date.
If recoveries have not come in six months before the legal final maturity date, an appraisal will be made by two independent experts. This assessment should, however, be minimal, given the four-year recovery period from the scheduled maturity date.
Standard & Poor's loss severity calculation assumes an average 36-month foreclosure period.
Early Redemption
The notes may be redeemed earlier on the occurrence of:
An early termination of the credit default swap (including an additional termination event if the repo is terminated); and
An issuer event of default, as described below.
Five days after the occurrence of this event, the notes would be redeemed at their outstanding principal amount regardless of whether there are defaulted reference obligations not yet written off.
Crédit Logement also has the option to terminate the credit default swap earlier:
On any quarterly payment date from December 2009;
On a clean-up call (assets being below 10% of the portfolio initial amount);
Should the regulatory treatment of the transaction make it less economic for Crédit Logement; or
On the occurrence of a tax event.
Should the protection buyer exercise its option, the notes will be redeemed to the extent that they are not affected by defaulted assets not yet written off. The mechanisms here are the same as on the scheduled termination date and full repayment of the notes would occur at the latest four years later.
Issuer events of default will be:
A failure to pay under the notes;
A failure to perform an obligation under the transaction documents that is materially prejudicial to the noteholders;
An insolvency, winding up, or bankruptcy of the issuer; and
The security created ceasing to be valid and enforceable.
Interest
Interest on the notes will be paid quarterly in arrears in an amount equal to EURIBOR plus a class-specific margin yet to be determined.
Interest due on the notes will be paid through the premium under the credit default swap and the repo premium.
Credit Analysis
The credit support levels will be sized based on the credit analysis of the reference portfolio to reflect the risk of loss to noteholders.
Standard & Poor's analysis comprises:
The sizing of foreclosure frequency, which is essentially based on the debt-to-income ratio of the underlying borrowers; and
The determination of the loss severity, which is derived from the LTV ratio and the expected market value decline of the property.
The product of the weighted-average foreclosure frequency (WAFF) and the weighted-average loss severity (WALS) is the potential loss on the portfolio.
When the indemnity under the guarantee is paid, Crédit Logement is subrogated in the rights of the bank up to the indemnification amount and mandated to recover past due payments.
In this transaction, Standard & Poor's has made assumptions on the percentage of loans for which Crédit Logement would initially obtain a first-ranking mortgage, based on the historical data provided and the transaction's eligibility criteria.
Additional stresses have also been applied to the loss severity to account for the provisional loss appraisal mechanics under the credit default swap. These stresses reflect the formula used for these appraisals and conservatively assume no potential repayment of losses provisioned in excess of realized losses, i.e., such reimbursement is dependent on Crédit Logement.
The reference portfolio will be replenished quarterly for a maximum period of 4.75 years as it amortizes, but eligibility criteria must be met for any new guaranteed loan to be included in the portfolio. These include the following:
The loan must have a maximum LTV ratio of 100% for each transaction (sum of all guarantees on the same financed property).
The reference portfolio must have a maximum weighted-average LTV ratio of 63.5% until the end of the fourth quarterly reference period, 62.5% until the end of the eighth quarterly reference period, and a maximum of 62.0% thereafter.
The maximum amount of the loan is €200,000 for all regions, except the Ile de France region, where the maximum is €400,000.
All properties must be owner-occupied.
A maximum of 5% of the reference portfolio can be second homes.
All loans must be amortizing and pay monthly.
The loan can have a maximum borrower debt-to-income ratio of 40%.
The loan must have a minimum average seasoning of six months for fixed-rate loans and 18 months for floating-rate loans.
Floating-rate loans may not represent more than 8% of the reference portfolio amount and none of them can finance a second home at the time of origination.
On each substitution, Standard & Poor's credit model will be run to ensure that any substitution does not result in a deterioration of credit protection offered to each class of noteholders.
Surveillance Details
Continual surveillance will be maintained on the transaction until the notes mature or are otherwise retired. To do this, quarterly servicer reports detailing the performance of the underlying portfolio will be analyzed, supporting ratings will be monitored, and regular contact will be made with the servicer to ensure that minimum servicing standards are being sustained and that any material changes in the servicer's operations are communicated and assessed.
Criteria Referenced
"Legal Criteria for Structured Finance Transactions" (published in April 2002).
"Criteria for Rating French Residential Mortgage-Backed Securities" (published in July 2003).
Related Articles
"Ratings Transitions 2003: Upgrades on the Rise as European Structured Finance Ratings' Stability Continues" (published on Jan. 15, 2004).
"Summary : Crédit Logement" (published on Sept. 20, 2004).
All criteria and related articles are available on RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. The criteria can also be found on Standard & Poor's Web site at www.standardandpoors.com.
