French Covered Bond Market Insights 2021 – S&P Global

In its Covered Bond Market Insights reports, S&P Global Ratings presents the local covered bond market, explains how the relevant legal framework works, compares key characteristics of existing programs, provides an overview on the local mortgage market, and presents the results of a scenario analysis. In this report, we review the French covered bond market.

Overview: France Is The New Leader

France was the largest covered bond issuer in 2020 with over €27.4 billion of benchmark issuance, representing 31% of European benchmark issuance, overtaking Germany for the first time. This occurred in a contracting market with 2020 issuance volumes more than 30% lower than 2019 levels. The situation is the same in 2021, with €9.8 billion of benchmark issuance to date, amounting to a 30.5% share. The main reason for French covered bonds’ rise to prominence is issuers’ continued reliance on investor-placed issuances in a period when several other European banks have shifted their funding focus to alternative sources, such as central bank refinancing operations.

The French covered bond market ranks second globally in 2021 as of date 2021, with over €321.6 billion of outstanding bonds. There are currently 19 French covered bond programs belonging to 14 banks and one corporate entity. The main collateral types backing covered bond programs are residential loans (mortgage and guaranteed), and–to a lesser extent–public sector exposures. The large outstanding covered bond volumes and continued issuance flow indicate that covered bonds are a primary funding source for French banks.



Covered bonds face competition from other funding instruments

In 2021 we expect French investor-placed benchmark covered bond issuance to be lower than in 2020, similar to that of other European issuers. This is due to issuers’ renewed access to competitively priced central bank funding and growth in bank deposits due to reduced consumer spending.

Implementation of the EU’s Harmonization Directive

In February, the French Treasury and the ACPR, the French Banking regulator, released a private consultation proposal to members of the French Banking Federation. Since the existing French legislation is already broadly in line with the EU directive on fundamental aspects, we understand that the scope of revisions to the current legislation is limited. The main change is expected to be a provision in the SFH/SCF legislation defining the extension conditions for soft-bullet covered bonds; this is in accordance with the EU legislator’s intention of removing issuers’ discretion on maturity extension and only permits it for objective reasons. In addition, we understand that there will be certain amendments to the ACPR’s regulatory reporting requirements, in particular on expanded liability details. We understand that the legislative amendments will be part of the DDADUE law project–implementing economic and financial matters under several EU directives–which should be approved by the French parliament in time for the EU Harmonization Directive deadline of July 8, 2021. We also understand that non-legislative amendments, that is, regulatory reporting aspects, will be implemented later, since they fall under the extended deadline of July 8, 2022.

Financing conditions remain favorable

Liquidity is ample enough to match the real economy’s funding needs, and orderly reflation is welcome, albeit this process is much slower in Europe than in the U.S. What’s more, the European Central Bank (ECB) still has enough ammunition to keep potential co-movements between European and U.S. yields in check (see “Economic Research: How Long Can The ECB Yield Shield Last?” published on June 11, 2021).

In Europe, we expect the ECB’s third round of targeted longer-term refinancing operations (TLTROs) to cut into bond issuance by banks in the region by offering an attractive funding substitute.

COVID-19 has had a limited impact on loan performance

In France, the consequences of the pandemic on the real economy have been heavy (GDP contraction of 8.2% in 2020) but the recovery is on its way and is expected to last. Payment deferral uptake in France–which several banks offer as a contractual option rather than an ad hoc measure–was around 5% in 2020 and about half of that in early 2021. This compares favorably with payment deferral levels observed in other core European countries (see “Covered Bonds 2021 Outlook: Policy Intervention Is Reshaping The Role Of Covered Bonds,” published Nov. 25, 2020, and “Credit Conditions Europe Q2 2021: New Horizons, Old Risks” published on March 31, 2021). We expect the unemployment rate in France to increase to 8.9% in 2021 from 8.2% in 2020, then peak at 9.2% in 2022 before declining in 2022 to 8.8%. However, we are currently seeing a limited impact of this increase on loan performance. This is mainly due to the combination of a supportive social benefit system and prudent underwriting standards.

Sustainable covered bonds are on the rise in France

Green and social covered bonds have remained a focal point for French issuers since 2020. So far this year, we’ve seen large issuances by various banks, including Caisse Française de Financement Local (Caffil)’s €750 million social bond in April. BPCE issued €1.25 billion of SFH green bonds in May 2020 and another €1.5 billion in May 2021. We expect other French entities to become sustainable covered bond issuers over the rest of the year and in early 2022, affirming France as a major participant in this space.

The Legal Framework: A Well-Balanced System

The French covered bond legislation encompasses two main legal frameworks: “société de financement de l’habitat” (SFH) and “société de crédit foncier” (SCF). An additional framework is exclusively dedicated to one issuer, the Caisse de Refinancement de l’Habitat. The SFH framework restricts eligible collateral to residential loans and is dedicated to the issuance of “obligations de financement de l’habitat” (OHs). The SCF framework can accommodate multiple collateral types including public-sector exposures, residential loans, and commercial real estate loans. Covered bonds issued under this framework are named “obligations foncières” (OFs). Both give credit to a loan-to-value ratio below an 80% threshold for standard residential loans, and prescribe a 15% cap to the proportion of substitution assets in the cover pool.

SFHs and SCFs–the covered bond issuer–are specialized credit institutions licensed and supervised by the “Autorité de Contrôle Prudentiel et de Résolution”, the French banking regulator. They are created as a wholly owned affiliate of a bank, for the purpose of refinancing the banking group to which they belong, and are remote from the bankruptcy of their parent. SFHs and SCFs have no employees or other resources, and are usually managed by their parent. As regulated entities, SFHs and SCFs are subject to quarterly compliance audits with legal covenants from the “contrôleur spécifique”, a cover pool monitor.

Bondholders have dual recourse to receive payments on the notes: to the SFH/SCF’s parent bank, and to the cover pool assets if the parent bank becomes insolvent.

Under a typical program’s terms, the SFH/SCF issuer uses the covered bond issuance proceeds to fund a credit facility made available to the parent bank (the borrower; see chart 3). Payments from the parent bank match the terms and conditions of the covered bonds, which ensures full and timely payments to the covered bondholders. A pool of eligible assets–the collateral security–is transferred to the issuer from the collateral providers (the parent bank or its lending subsidiaries) as security for the covered bond noteholders. If the parent bank defaults on its obligations, this security will be enforced.

In our view, these frameworks strike a good balance between effective protection of covered bondholders, flexibility to include multiple asset types, and clear program management thresholds for minimum overcollateralization, liquidity coverage, and maturity mismatch requirements.


Legal Framework Comparison
France (SFH) France (SCF) Germany Netherlands U.K.
Product Obligations à l’Habitat (OH) Obligations Foncières (OF) Pfandbriefe Registered covered bonds Regulated covered bonds (RCB)
Legislation Article L. 515-34 and seq. of the French Monetary and Financial Code Articles L.513-2 to L.513-27 and R.513-1 and seq. of the French Monetary and Financial Code PfandbriefAct (Pfandbriefgesetz – PfandBG) from May 22, 2005, amended in 2009, 2010, 2013, 2014, and 2015 Financial Supervision Act as amended in 2014 and subsequent amendments Regulated covered bond regulations 2008 and subsequent amendments
Issuer Specialized credit institution Specialized credit institution Universal credit institution with a special license Universal credit institution with a special license Universal credit institution with a special license
Owner of the cover assets Credit institution (pledged to the issuer and transferred upon trigger event) Issuer or credit institution (pledged to the issuer and transferred upon trigger event) Issuer SPE (guarantor of the covered bonds) SPE (guarantor of the covered bonds)
Cover asset type Residential loans and securitizations Public sector assets, residential loans, securitizations, and credit institutions Public sector assets, mortgage loans, ship loans, aircraft loans, and credit institutions Mortgage loans, public sector exposures, ship loans, and credit institutions Mortgage loans and public sector exposures
Mortgage cover asset location EEA (currently domestic only) EEA EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, and Singapore EEA (currently domestic only) EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, Channel Islands, and Isle of Man
Residential mortgage cover assets LTV limit 80% Residential: 80%; state-guaranteed loans: 100% 60% 80% Residential: 80% LTV under the CRD. Program documents on Regulated Covered Bonds currently a 75% LTV limit.
Primary method for mitigating market risk “Natural” hedging stress testing Derivatives “Natural” hedging stress testing “Natural” hedging stress testing Derivatives
Mandatory overcollateralization 5% nominal 5% nominal 2% NPV 5% nominal 8% nominal
French Covered Bond Programs–Overview
Program Covered bond rating Outstanding covered bonds (mil. €)* Maturity profile Collateral type Link to surveillance report Link to transaction update
Mortgage covered bond programs
AXA Home Loan SFH AAA/Stable/– 3,500 Soft bullet 100% residential AXA SFH TU AXA SFH
BNP Paribas Home Loan SFH AAA/Stable/– 31,054 Soft and hard bullet 93.7% residential,6.3% substitute assets BNP Paribas SFH TU BNP Paribas SFH
BPCE SFH AAA/Stable/– 31,815 Soft and hard bullet 100% residential BPCE SFH TU BPCE SFH
Credit Agricole Home Loan SFH AAA/Stable/– 31,530 Soft and hard bullet 98.9% residential,1.1% substitute assets Credit Agricole SFH TU Credit Agricole SFH
Credit Mutuel Home Loan SFH AAA/Stable/– 21,887 Soft and hard bullet 99.2% residential, 0.8% substitute assets Credit Mutuel SFH TU Credit Mutuel SFH
HSBC SFH AAA/Stable/– 3,250 Soft and hard bullet 97.2% residential, 2.8% substitute assets HSBC SFH TU HSBC SFH
La Banque Postale Home Loan SFH AAA/Stable/– 17,216 Soft and hard bullet 100% residential La Banque Postale SFH TU La Banque Postale SFH
MMB SCF AAA/Negative/– 1,600 Soft bullet 97.9% residential, 2.1% substitute assets MMB SCF TU MMB SCF
Public covered bond programs
Caisse Française de Financement Local SCF (CaFFiL) AA+/Stable/– 50,919 Hard bullet 98.1% public sector, 1.9% substitute assets CaFFiL SCF TU CaFFiL SCF
Compagnie de Financement Foncier SCF (CFIF)§ AAA/Stable/A-1+ 56,031 Hard bullet 52.2% mortgages, 34.1% public sector, 12.7% substitute assets, 1% other CFIF SCF TU CFIF SCF
Crédit Agricole Public Sector SCF AAA/Stable/– 4,000 Soft bullet 99.5% public sector, 0.5% substitute assets Credit Agricole SCF TU Credit Agricole SCF
GE SCF AA/Stable/– 362 Hard bullet 75.2% public sector, 24.8% substitute assets GE SCF TU GE SCF
Société Générale SCF AAA/Stable/A-1+ 11,470 Soft and hard bullet 98.2% public sector, 1.8% substitute assets Société Générale SCF TU Société Générale SCF

Features Of French Covered Bond Programs

Residential loans

A fixed-rate lending market.   Due to the prevalence of fixed-rate (for life) residential loans in the French market, SFH covered bond programs mainly issue fixed-rate notes and rely on a natural hedge with no ad hoc interest rate swaps. We assess the extent to which these natural hedges affect overcollateralization requirements through our cash flow analysis.

An emphasis on DTI.   The main borrower eligibility criterion under French banks’ credit underwriting policies is the debt-to-income (DTI) ratio, in contrast to other mortgage markets such as the U.S. or the U.K. where more importance is given to property valuations. Underwriting standards are generally conservative, and the maximum DTI is typically 33%. As a result, the performance of French residential loans is less linked to house prices than in the U.S. or U.K. This, coupled with a very strong social benefit support system, means that portfolio performance is less cyclical and tends to suffer fewer losses in times of economic downturns than in other countries.

Guaranteed loans as market standard.   French residential loans are secured either by a traditional mortgage deed or by a guarantee (known as caution) provided by an insurer or a credit institution. On default of a guarantee-secured loan, the lender recovers the guaranteed amount from the guarantor, which then manages the recovery process and, if applicable, the eventual foreclosure of the property. Loans guaranteed by cautions are a unique feature of the French market. As of 2019, cautions represented 61.9% of outstanding loans and their share is increasing.

Public-sector exposures  Public-sector underlying collateral types are relatively diverse, ranging from loans to French local and regional governments (LRGs), public hospitals, and other public entities, to export-finance loans guaranteed by export credit agencies in France and abroad. Our credit analysis includes an assessment of the creditworthiness of the various obligors and guarantors.

Mortgage Market Overview: House Prices Growth Stabilizes As Pandemic-Led Demand Eases

Following an 8% GDP decline in 2020, we expect France’s economic activity to bounce back by first-quarter 2022. For now, the industrial revival, supported by strong external demand, along with consumers and firms’ resilience, are cushioning the impact of tighter restrictions on consumer spending (see “European Economic Snapshots: Unlike The Rest Of Europe, The U.K. Is Looking Beyond COVID-19,” published April 28, 2021).

From the second half of 2021, an easing of restrictions alongside the widespread rollout of vaccines should spur household spending, leading to a strong rebound in services activity. The economic recovery should continue throughout the year, supported by household income and fiscal and monetary stimulus, with GDP set to rebound by 5.6% in 2021, 4.2% in 2022, and 2% in 2023.

Economic Indicators
2019 2020 2021f 2022f 2023f
Real GDP growth (%) 1.5 -8.2 5.6 4.2 2.0
Unemployment rate (%) 8.5 8.2 8.9 9.3 8.8
Nominal house prices (% y/y) 3.9 4.0 1.5 2.0 2.0

The unemployment rate will remain elevated, rising to about 8.9% in 2021 and 9.3% in 2022, before decreasing only gradually to 8.8% in 2023. Short-time work schemes have helped cushion the French labor market. In addition, structural reforms over the past 10 years have made labor markets more responsive to growth in Europe, especially in France.


Property market outlook: House prices should increase more slowly in 2021

We expect that, after sustained rises of 3.9% in 2019 and 4.0% in 2020, house prices will increase by 1.5% in nominal terms in 2021, and by 2% annually in 2022 and 2023, while the house price-to-income ratio moves toward the long-term average (see “Europe’s Housing Market Will Chill In 2021 As Pent-Up Pandemic Demand Eases,” published on Feb. 22, 2021).

Spending most of their time at home, people are apparently placing more value in owning a home. The price-to-rent and price-to-income ratios rose further in 2020 and are close to their all-time highs in most European markets. Home purchase intentions are at their highest since 2003 in the eurozone, and at a record high in France.



Local And Regional Government Lending: Loan Origination Remains Moderate

High capital expenditure (capex) and tighter budgets linked to the COVID-19 pandemic will widen French local and regional governments’ (LRGs’) deficits after capital accounts. After a jump in 2020, new borrowings will increase to around €16 billion on average in 2021-2022, compared with €13.6 billion in 2019, with total debt at almost €155 billion or higher by the end of 2021. We anticipate that market liquidity and credit supply will remain ample, and at favorable conditions for both short and long terms, fueling bond issuance alongside investors’ rising interest in sustainable financing in line with Europe’s “green” agenda.

We estimate that, this year and next, French LRGs will borrow about €16 billion, slightly higher than the €15.6 billion recorded in 2020, as the economic and social impact of the pandemic keeps budgets under pressure. Last year, French LRGs issued about €3.9 billion of medium- to long-term bonds, more than three times the amount in 2019 (€1.1 billion); this amount represented 25% of total gross borrowings, boosted by favorable liquidity and pricing conditions (see “Local Government Debt 2021: French LRG Debt Could Surpass €155 Billion Within A Year,” published on March 25, 2021).

Comparison Of French Covered Bond Programs

On top of a strong economy, French covered bonds benefit from the support of highly rated issuers. In our analysis of covered bond programs, the issuer is the first recourse for bondholders. Therefore, strong issuers benefit the covered bond programs’ creditworthiness. A highly-rated issuer can translate into unused notches of ratings uplift, offering some buffer against decreasing available credit enhancement.

Even though French covered bonds tend to perform strongly on average, there are some differences in characteristics and credit and cash flow results among programs. Below we present and compare the key characteristics of the French covered bond programs that we rate.

French Mortgage Covered Bond Programs–Key Characteristics
Program Outstanding covered bonds (mil. €) No. of loans WA LTV (%)* WA seasoning (months) Interest rate type Repayment type WAFF (%) WALS (%)

AXA Home Loan SFH

3,500 27,552 64.30 39.9 100% fixed 100% amortizing 11.9 34.8

BNP Paribas Home Loan SFH

31,054 319,965 60.40 50.4 96.62% fixed, 0.15% floating, 3.23% other 100% amortizing 11.6 29.0


31,815 611,991 62.80 62.7 99.29% fixed, 0.07% floating, 0.64% other 100% amortizing 11.5 37.9

Compagnie de Financement Foncier SCF (CFiF)§

56,031 426,232 72.30 79.0 92% fixed, 8% floating 100% amortizing 13.2 48.5

Credit Agricole Home Loan SFH

31,530 751,383 57.40 89.8 95.5% fixed, 4.5% floating 100% amortizing 13.2 26.1

Credit Mutuel Home Loan SFH

21,887 392,237 60.00 70.0 96.8% fixed, 3.2% floating variable 100% amortizing 10.6 26.9

HSBC SFH (France)

3,250 39,017 43.90 63.6 100% fixed 100% amortizing 16.0 13.9

La Banque Postale Home Loan SFH

17,216 303,741 59.50 59.6 100% fixed 100% amortizing 10.2 32.9


1,600 20,618 51.00 39.6 90.69% fixed, 8.90% floating, 0.40% other 100% amortizing 31.0 21.5
French Public Sector Covered Bond Programs–Key Characteristics
Program Total outstanding assets (mil. €)* Total outstanding liabilities (mil. €)* Public sector assets (%) Scenario default rate (%)/scenario loss rate (%) Weighted-average cover pool rating Available credit enhancement (%) Target credit enhancement (%)
Caisse Française de Financement Local SCF (CaFFiL) 58,769 50,919 98.1 33.27 BBB- 14.9 19.8
Compagnie de Financement Foncier SCF (CFiF)§ 66,996 56,031 34.12 35.02 BBB 19.54 10.21
Crédit Agricole Public Sector SCF 5,983 4,000 99.5 15.64 BBB 45.3 23.7
GE SCF 529 362 75.2 N/A N/A 47.23 WH
Société Générale SCF 15,127 11,470 98.2 33.76 BB+ 28.78 12.76


Ratings Outlook: High Issuer Credit Ratings And Unused Notches Underpin Stable Ratings

The majority of French covered bond programs are rated ‘AAA’ (see chart 8).


Table 5 shows our average credit enhancement calculations across countries. French programs present on average relatively fairly low credit and market risk. The target credit enhancement is the overcollateralization required to achieve the maximum potential collateral-based uplift. It covers asset default risk, or credit risk, and market value risk, which is the credit enhancement that we expect to be required to refinance the cover pool in a stressed environment.

French Covered Bond Programs–Credit Enhancement
Program Available credit enhancement (%) Target credit enhancement (%) ‘AAA’ credit risk (%) O/C consistent with the current rating (%) Unused notches
Mortgage Covered Bond Programs
AXA Home Loan SFH 15.00 2.50 2.50 2.50 5
BNP Paribas Home Loan SFH 22.34 12.75 9.78 9.78 5
BPCE SFH 45.95 3.95 3.95 3.95 5
Credit Agricole Home Loan SFH 60.05 4.38 3.74 3.74 5
Credit Mutuel Home Loan SFH 59.92 11.46 5.23 8.35 4
HSBC SFH 23.08 7.69 2.50 2.50 5
La Banque Postale Home Loan SFH 33.21 4.46 2.50 3.47 4
MMB SCF 22.18 7.01 3.57 7.01 0
Public Sector Covered Bond Programs
Caisse Française de Financement Local SCF (CaFFiL) 14.90 19.80 6.02 6.02 0
Compagnie de Financement Foncier SCF (CFiF)* 19.54 10.21 7.16 7.16 5
Crédit Agricole Public Sector SCF 45.30 23.70 21.28 21.28 5
GE SCF 47.23 WH WH 17.67 WH
Société Générale SCF 28.78 12.76 2.94 7.85 2


Chart 9 shows our average cash flow calculations across countries. French programs present on average relatively low credit and market risk.

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