Moody's: French covered bonds remain strong, despite sovereign downgrade

French covered bonds backed by residential mortgages and public sector debt have maintained their ratings, following the sovereign downgrade on 18 September 2015 and the downgrade of some French banks on 23 September 2015. Moody's Investors Service expects that the credit quality of French covered bonds will remain strong because (1) most French banks remain highly rated; (2) most programmes can withstand a multi-notch downgrade of the sponsor bank; (3) the cover pools remain of an overall good credit quality; and (4) the level of over-collateralisation (OC) largely compensates for the sovereign and banks' downgrades, where necessary.

Moody's report titled "French Covered Bonds Have Withstood the Downgrade of France's Sovereign Rating" is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"France's rating outlook remains stable and we do not expect a deterioration in French covered bonds credit quality over the next 12 to 18 months, due to sovereign credit worthiness", said Elise Lucotte, a Vice President -- Senior Analyst at Moody's.

Moody's notes that some key drivers of the sovereign rating action are credit negative for French cover pools, such as persistently high unemployment for mortgage covered bonds and the challenges to a material reduction in the government's debt burden for public sector covered bonds. However, the impact of a deterioration in collateral on the covered bonds' credit quality should not be overestimated, as collateral losses will continue to have a low impact on covered bond credit quality.

The deterioration in France's and certain French bank's credit quality has a negative credit effect on nine covered bonds programmes. However, Moody's continues to rate these covered bonds Aaa because the negative effect is mitigated by high banks' ratings and sufficient over-collateralisation for these programmes. These negative effects are the result of (1) for four programmes, a higher probability that the bank will cease supporting its covered bonds before recourse to the cover pool following the deterioration in the credit worthiness of the sponsor bank; (2) for three programmes, the deterioration of their French public sector cover pool only; and (3) for two programmes, a combination of these two reasons. Ultimately, the level of over-collateralisation required to maintain the assigned ratings has increased for six programmes but currently available over-collateralisation largely exceeds the increased level.