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By Valerie Hart
The new mortgage bond market in France got under way in October, with 'AAA' rated "obligations foncieres" (mortgage bonds) issues by Compagnie de Financement Foncier and Dexia Municipal Agency, respectively owned by Credit Foncier de France and Credit Local Dexia. Another société de crédit foncier is expected to be created before year-end by Crédit Foncier et Communal d'Alsace Lorraine. It has been estimated that mortgage bonds could reach up to 20% of France's entire bond market (new issuances) within the next five years.
"The French Government wants to create a mortgage bond market similar to Germany's Pfandbriefe and provide French banks with an equally competitive funding instrument to what the German banks have. It also wants to create a new large bond segment," said Alain Carron, Standard & Poor's director of Structured Finance in Paris.
The Credit Foncier's 1.5 billion euro mortgage bonds due 2010 were issued through a "société de crédit foncier" (SCF; a special-purpose financial institution) Compagnie de Financement Foncier, while Dexia's Eur1.25 billion mortgage bonds due 2002 and Eur1.25 due 2010 were issued by SCF Dexia Municipal Agency.
The "SCF" vehicle was created under the law on mortgage bonds passed on June 25. The law aims to ensure that the cash flows from the SCF's assets to the holders of mortgage bonds continue uninterrupted even if the SCF should go bankrupt. As a result, Standard & Poor's rating analyses focuses on the collateral or asset pool rather than on the SCF's corporate credit rating.
Two institutions were obliged by law to transfer most of their existing assets and liabilities to a newly created SCF: Crédit Foncier de France and the much smaller regional entity Crédit Foncier D'Alsace Lorraine. The new legal framework is however open to all financial institutions, and Dexia chose to use this new funding vehicle for their French entity.
"Standard & Poor's assigned the bonds its 'AAA', partly because of their level of overcollateralization, which stems from the level of outstanding debt that benefits from the privilege of the law being lower than the asset base," said Mr. Carron.
Standard & Poor's factors into its rating the degree of interest-rate risk in the bonds' structure, which, as in Pfandbriefe, exists because of the amortization profile of the debt being different from that of the assets.
Collateral for the bonds can include mortgages, loans to public authorities, and asset-backed securities backed by these assets. Dexia, which is a merger of France's Crédit Local de France and Belgium's Credit Communal de Belgique, lends to local authorities and public entities in the European Economic Area. Assets transferred by Crédit Foncier de France to its SCF are mostly residential loans to individuals, but include also loans to the social housing sector and to local authorities.
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