Obligations Foncières - OF

1 Who is the issuer?
  • Specialized credit institution
  Comments: Sociétés de crédit foncier ("SCFs") are the French special-law based covered bonds issuers. They are governed by Article L.513-2 and seq. of the French Monetary and Financial Code (the "Code") relating to SCFs and, as credit institutions, by the general banking regulation including an Order of 3 November 2014 (former regulation 97-02) regarding the internal control in the banking industry.
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
3 Who owns the cover assets?
  • The issuer directly
  Comments: Also, credit institution, but pledged to the issuer (with transfer to the issuer upon trigger event).
4 Is the issuer the originator of the assets?
  • Yes
  • No
  Comments: Under Article L.513-2 of the French Monetary and Financial Code, SCFs are allowed either to grant or to acquire mortgage loans or exposures on public sector but generally, they are not the originators of the assets.
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
  Comments: The articles L.513-2 to L.513-27 and R.513-1 and seq. of the French Monetary and Financial Code govern the legislation of the SCF.
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
  Comments: The special bankruptcy regime applicable to the SCF results from Articles L.513-11 and Articles L.513-18 to L.513-21 of the French Monetary and Financial Code. The main features of this regime are as follows:
-the judicial liquidation of a SCF does not accelerate the payment of the privileged debts of the SCF that are paid on their contractual due date and with priority over all other debts.
-until the privileged debtors are fully paid off, no other creditor of the SCF may avail itself of any right over the SCF's property and rights.
-the judicial reorganisation or liquidation of a company holding shares in the SCF can’t be extended to the SCF. As a result, SCFs are totally bankruptcy remote and enjoy full protection from the risks of default by their parent company or by the group to which they belong.

Furthermore, Article L. 513-21 of the French Monetary and Financial Code stipulates that, notwithstanding any legal or regulatory requirements to the contrary, notably those of Section II of Volume VI of the French Commercial Code, contracts for servicing and recovering loans of a SCF can be immediately terminated in the event that a company responsible for the servicing of such loans is placed under legal receivership or liquidation.
1 What types of assets may be included in cover pools?
  • Exposures to public sector entities
  • Mortgage loans (Mortgage loans for the purpose of this question are taken to include guaranteed real-estate loans.)
  • Group originated Senior MBS
  • Senior MBS issued by third parties
  • Exposures to credit institutions
  Comments: Exposures on credit institutions are only allowed in the form of replacement assets, up to 15% of the outstanding privileged debt issued (covered bonds and other debt issued benefiting from the Privilege of Article L.513-11 of the French Monetary and Financial Code). Replacement assets are considered to be sufficiently secure and liquid assets as defined in Articles L.513-7 and R.513-6 of the Code. Replacement assets have to qualify for the credit quality step 1. If the maturity of these assets doesn’t exceed 100 days, the credit quality step 2 is equally allowed.
Exposures on public sector entities under leasing format are also allowed.
2 What is the geographical scope for public sector assets?
  • Domestic
  • Multilateral development banks
  • EEA
  • CH
  • USA, Canada, Japan
  • NZ AUS
  • Other
  Comments: Others are, as defined in Article L.513-4 and R.513-2 of the French Monetary and Financial Code, Central administrations and Central banks not belonging to the above mentioned geographic scope but the States of which are benefiting from at least the credit quality assessment step 1 (step 2 up to 20% of the privileged liabilities) issued by a rating agency recognised by the French banking supervisor.
3 What is the geographical scope for mortgage assets?
  • Domestic
  • EEA
  • Other
  Comments: Others are States qualifying as at least the credit quality assessment step 1 issued by a rating agency recognised by the French banking supervisor (Article L.513-3).
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
1 LTV is calculated using which valuation?[4]
  • Mortgage lending value
  Comments: According to CRBF Regulation 99-10 relating to SCFs, real estate properties are valued on a yearly basis. They are valued conservatively, excluding any element of a speculative nature. Valuations have to be made on the basis of the lasting, long-term characteristics of the real estate properties, normal market and local conditions, the current use of the real estate and other uses to which it could be assigned. This mortgage lending value shall be determined clearly and transparently in writing and may not exceed the market value.
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
  • Commercial      
  Comments: Pursuant to Article R.513-1 of the French Monetary and Financial Code, a mortgage or guaranteed loan can only be refinanced by privileged debts in the limit of the smallest following amount :
- the outstanding principal amount of the loan,
- the product of the financing share of the loan and the value of the real estate.

The financing share of the loan is equal to:
- 60 per cent of the value of the real estate given in guarantee,
- 80 per cent of the value of the real estate given in guarantee when the loan has been granted to individuals in order to finance the building or the acquisition of a housing or in order to finance the acquisition of the building land and the construction of the housing.
- 100 per cent of the value of the real estate when the loan benefit from the guarantee of the Guarantee Fund for Social Home Ownership (FGAS).

The acquisition by a SCF of senior units of RMBS is subject to similar rules as more described in Article R.513-3 of the Code.
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • Yes
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • No
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
  • No
5 Is there any additional LTV limit on a portfolio basis?
  • No
Exposure to market risk
1 Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract?
  • Yes
  Comments: SCFs are required to comply with a number of specific management rules intended to ensure the matching of assets and liabilities in terms of interest rates and maturities.
Exposure to market risk is required to be mitigated by an Order of 3 November 2014 (former regulation 97-02) regarding the internal control in the banking industry.
2 What is the primary method for the mitigation of market risk?
  • “Natural” matching (matching without the use of off-balance sheet instruments) and stress testing
  Comments: Also, use of derivative hedge instruments.
3 If the answer to the above question on market risk mitigation is “Use of derivative hedge instruments”, please specify whether those instruments are entered into:
  • By the time of issue of covered bonds or entry of asset in the cover pool
4 What type of coverage test is applied?
  • Not relevant
  Comments: As a credit institution, a SCF is governed by an Order of 3 November 2014 (former regulation 97-02) regarding the internal control in the banking industry. A SCF measures itself interest rate and currency risks. These measures must be quarterly reviewed by the French Banking Authority and by the Specific Controller. In this framework, each issuer is able to choose its type of coverage test.
5 What is the frequency of coverage calculations?
  • Daily
  Comments: It depends on the issuer’s choice. The SCF must ensure that it complies, at any time, with the regulation relating to the coverage ratio and ALM congruency.
6 What types of stress scenarios are applied?
  • Static
  • Dynamic
7 What is the frequency of stress test calculations?
  • Quarterly
  Comments: Test calculations must be completed at least quarterly, an implementation of a more frequent calculations depends on the policy of the issuer.
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
  • Yes
  Comments: By law.
Under Article R.513-7 of the French Monetary and Financial Code, SCFs must, at any time, manage their liquidity risk over a period of 180 days. In addition to specific rules, SCFs are required to comply with an Order of 3 November 2014 (former regulation 97-02) regarding the internal control in the banking industry. Exposure to liquidity risk is required to be mitigated by Article 148 of the Order.
9 What is the primary method for the mitigation of liquidity risk on interest payments?
  • “Natural” matching (matching without the use of off-balance sheet instruments) and stress testing (Natural matching is taken to include replacing CBs with new issues, as well as substitute assets.)
  Comments: Replacement assets are a key instrument to achieve the "natural" matching.
In addition, SCFs have a direct access to the French Central Bank, even after the bankruptcy of the mother company. The law allows them to enter into repo transactions.
10 What is the primary method for the mitigation of liquidity risk on principal payments?
  • Natural matching (matching without the use of off-balance sheet instruments) and stress testing
  Comments: Replacement assets are a key instrument to achieve the "natural" matching.
In addition, as a credit institution, a SCF has a direct access to the French Central Bank, even after the bankruptcy of the mother company. The law allows it to enter into repo transactions.
11 Is there any grace period in case of a breach of liquidity risk mitigants?
  • No
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
  • Other regulatory or rule-based action
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
  • Supervisory authority
  • Trustee/cover pool monitor
  • Other
  Comments: Other is the Specific controller defined by Article L.513-23 of the Code. He is selected from the official list of auditors. According to the CRBF Regulation 99-10, the Specific controller controls an adequate matching of maturities and interest rates and alerts the French Banking Authority should he consider the levels are insufficient.
14 Are there any regular public reporting requirements for market and liquidity risk?
  • Yes
  Comments: The reporting must be done at least quarterly.
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • By legislation/regulation
16 What is the level of minimum mandatory overcollateralisation?
  • 5%
  Comments: Article L.513-12 of the French Monetary and Financial Code requires that, at any time, the total amount of the SCF’s assets must be greater than the outstanding amount of its privileged debt. The 105% minimum level of overcollateralization is provided by Article R.513-8 of the Code.

Overcollateralisation, defined by law (Article L. 513-12) requires that total weighted assets of SCFs (specified in the chapter on the basics of obligations foncières) are always equal to at least 105% of the total amount of liabilities benefitting from the preferential claim (Article R.513-8 of the French Monetary and Financial Code). One of the Specific Controller’s duties is to monitor compliance with this regulatory overcollateralisation rule.
When calculating regulatory overcollateralisation, as stated in CRBF Regulation No. 99-10 as amended, assets must be weighted in accordance with their quality and their nature.
The non collateralised exposures with the group to which the SCF belongs are limited to 25% of the non privileged resources.
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
18 Is there any grace period in case of a breach of the coverage test?
  • No
19 What is the consequence of not fixing a breach of the coverage test?
  • Other regulatory or rule-based actions

Global comments for this chapter

In addition to all measures aiming at ensuring the liquidity of the SCF, SCFs are incorporated as credit institutions and have a direct access to the French Central Bank refinancing, even after the bankruptcy of the mother company. The law allows them to enter into repo transactions.
1 Is a special license required for the issuing of covered bonds?
  • Yes with additional requirements compared to general banking supervision regulations
2 Are there special reporting duties of the covered bond issuer to the supervision authority concerning covered bonds and the cover pool, which go beyond the regular banking supervision?
  • Periodic reporting required
  Comments: A SCF must deliver quarterly (and within a period of 45 days after the end of the quarter) a reporting to the French Banking Authority. Furthermore, the issuer has to communicate quarterly an overcollateralization certification and a bond issuance program to the French Financial Markets Authority.
3 What is the role of the banking supervision regarding covered bonds?
  • To check whether eligibility criteria are fulfilled and documented
  • Checking quality of cover assets (real estate valuations, etc)
  • Monitoring of exposure to market risk and liquidity risk
  • Evaluation of operational risk
  • To check minimum mandatory overcollateralisation requirements
  Comments: The banking supervision has an additional role which consists in approving the management of the issuer.
4 Is there a special role of banking supervision in crisis regarding covered bonds?
  • Safeguarding ongoing management of the cover pool directly or via a special administrator
5 Is there a cover pool monitor independent from the issuer?
  • Yes
  Comments: The cover pool monitor who is independent from the issuer is the Specific controller defined by Article L.513-23 of the French Monetary and Financial Code.
6 If there is an independent cover pool monitor, what are its duties?
  • Performing audits of the cover pool
  • Reporting duties to the supervision authority
  • Verification of coverage tests
  • Other, please specify:      
    He verifies the eligibility of the assets to the cover pool, certifies that the SCF complies with its overcollateralization, ALM and revaluation of the real estate properties duties. He reviews the internal processes of the SCF. He certifies the documents sent to the Banking Commission. He prepares an annual report on his mission for the company's executives and deliberative structures. He may attend any meeting of shareholders and may address the Board of Directors or the Executive Board upon request. He must reveal to the Public Prosecutor any criminal acts of which he has knowledge, without incurring liability in relation to that revelation. He is liable towards both the company and third parties for the prejudicial consequences of any breach or negligence in the performance of his duties. The Specific Controller certifies that the SCF complies with the Coverage ratio rules for any issue of privileged debt of an amount equal or above EUR 500M, and he validates the quarterly program of debt issued.
  Comments:
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
2 What is the cover pool?
  • All assets of the issuer’s balance sheet
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  • Preferential claim by law
  Comments: They benefit from the privilege of article L.513-11 of the French Monetary and Financial Code under which they have the right to be paid by preference to all others creditors including the State.
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, senior to unsecured creditors
  Comments: All the assets of the OFs issuing credit institution secure the OFs and other privileged debtors of the credit institution.
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • Yes
6 If derivatives are permitted in the cover pool, what is their ranking?
  • Pari passu to covered bond holders
  • Subordinated to covered bond holders
  Comments: The sums due under the derivatives entered into by SCFs to cover their assets and liabilities elements and to manage or cover the global risk on their assets, liabilities and off-balance-sheet items have privileged status. The sums due under derivatives used to cover the non-privileged debts of the SCF do not have such privileged status.
1 Does the covered bond fulfil the criteria of UCITS 52(4)?
  • Yes
2 For further information regarding the compliance to the criteria of Article 129 of the Capital Requirements Regulation (CRR), please see the following links: http://ecbc.hypo.org/Content/default.asp?PageID=504#position https://www.coveredbondlabel.com
3 Are listed covered bonds eligible in repo transactions with the national central bank?
  • Yes
  Comments: Covered bonds are eligible for repo transactions with the ECB, except those whose asset covered pools still contain securitisations not originated by the affiliation group of the issuer.
4 Are there any special investment regulations regarding covered bonds?
  • Yes
1 Link to National Association representing covered bond interests
  • Association
2 Link to national regulators and supervisors
3 Fact Book Country Chapter
  • Chapter
 
4 Hypostat Country Chapter
  • Chapter