Obligations foncières of Compagnie de Financement Foncier are rated by Standard & Poor’s (S&P), Moody’s and Scope Ratings.
|Standard & Poor’s (S&P)||Moody’s||Scope Ratings|
The rating of Compagnie de Financement Foncier not only reflects the stringent legal and regulatory framework but also the additional commitments it has made to investors, taken into account by the rating agencies.
Indeed Compagnie de Financement is required to effect management requirements allowing it to achieve overcollateralization above the regulatory minimum and minimize its risksCredit and counterparty risks
Credit and counterparty risks
Asset purchasing criteria by category
Although regulations require that a société de crédit foncier invest only in high quality assets, Compagnie de Financement Foncier implements additional asset purchasing criteria for each asset category, so as to limit its exposure to credit risk.
Compagnie de Financement Foncier selects the assets that it wishes to acquire based on their rating, probability of default, score at origination, expected loss and any hedging of assets, as well as yield curves. The assets that meet the Compagnie de Financement Foncier’s criteria are then purchased at a price determined by the previous study.
Furthermore, Compagnie de Financement Foncier replacement values have very good external credit ratings. The minimum acceptable credit rating for each asset (except for intragroup assets) depends on the investment horizon and must meet the minimum rating criteria of each of the two main agencies, as shown below:
|Standard & Poor’s||Moody’s|
|From 0 to 59 days||ST : A1||ST : P1|
|From 60 days to 1 year||ST : A1 +||ST : P1|
|LT : Aa3|
Scope Ratings applies no predefined minimum rating. The analysis is done on a case by case basis.
Limiting counterparty risk
Crédit Foncier Group’s risk policy specifies per-counterparty limits and Compagnie de Financement Foncier observes these limits in its decision process.
For its hedging transactions and the company executes a framework agreement with each of its counterparties, with asymmetrical collateralisation and other specific terms set forth in an appendix to this agreement.
Each counterparty agrees to pay Compagnie de Financement Foncier on a daily basis (or on a weekly basis for some of them) depending on the counterparty’s rating a security deposit equal to its net debt position, with no compensation for this.
On 9 January 2013, Compagnie de Financement Foncier made the following committments:
- in the event of a counterparty’s downgrade rating below a certain level, new circumstance allowing Compagnie de Financement Foncier to terminate a swap contract: committment to find under sixty days an equivalent coverage or to have the necessary overcollateralisation to set off the risk that has become uncovered for swaps overpassing 5% of obligations foncières outstanding;
- in the event of BPCE’s downgrade rating below A1 (Standard & Poor’s rating): committment to put in order under sixty days non-compliant swap contracts and whose outstandings overpass 5% of the privileged resources, or to replace the counterparties.
Currency and interest rate risks
Systematically hedged variable-rate assets and liabilities
Management of interest rate risk
Compagnie de Financement Foncier is committed to keeping its interest rate gaps within the specific limits set for each period and to correct any excess observed by the following quarter:
|Horizon||Limits as a % of N-1 balance sheet (start of period)|
|Less than 2 years||2%|
|Threshold of 8-15 years||5%|
No currency risk
Compagnie de Financement Foncier prohibits any open foreign exchange positions. As such, all asset purchase or refinancing transactions that are not denominated in euros are systematically hedged against currency risk.
In practice, Compagnie de Financement Foncier limits its residual currency positions to €3m by currency with a €5m cap for all currencies.Hedging liquidity risks
Hedging liquidity risks
Beyond the legislative constraints requiring that sociétés de crédit foncier ensure that, at all times, all of their cash flow requirements are hedged for a period of 180 days, Compagnie de Financement Foncier has its own additional strict rules. These rules guarantee that it always maintains enough liquidity to honour its privileged liability commitments with no need for new resources for one year in a run-off scenario (i.e. with no new activity).
The high quality of Compagnie de Financement Foncier’s assets, and in particular of its eligible securities and receivables, give it immediate access to funding from central banks, such as the ECB for large amounts.
Thus, the Company’s cash position is sufficient at any given time to meet the contractual payments on its privileged debt over the coming twelve months.
With the volume of Compagnie de Financement Foncier’s assets eligible for the European Central Bank’s liquidity facility (€10.3 bn as of December 31, 2018), it could service its payments and build up its liquidity for much longer than the 12 months to which it is committed. It might as well get an amount that can be estimated at €7.4bn (as of December 31, 2018) after discount and on the basis of the current rules of the ECB, while respecting its management rules of which the respect of the regulatory overcollateralization ratio.
Compagnie de Financement Foncier also limits the average maturity between its assets and its overall liabilities to two years at most.Rating agencies’ reports