French RMBS first sparks calls for regulatory rethink

Author: Gemma Varriale | Published: 9 Jul 2014
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Credit Foncier’s offering of €1 billion residential mortgage backed securities (RMBS) has been hailed as the deal that could reopen the French securitisation market. But it has also revealed key regulatory issues that will determine the fledgling market’s future.

The bellwether deal, which was three times over-subscribed, securitised a portfolio of 8,900 loans, worth €922 million.

It was the first French RMBS securitisation to achieve full deconsolidation, meaning that the assets will receive off balance sheet treatment. It was also the first RMBS transaction to be fully placed with investors since 1995.

"It’s a sign that international investors are interested in French RMBS," said Jonathan Lewis, a Paris-based partner with Clifford Chance. "Its success could tempt other banks to issue into the RMBS market."

Credit Foncier itself has expressed an interest in a long-term strategy of securitisation. Following its maiden issue, the French mortgage provider intends to issue €2 billion RMBS a year to deconsolidate assets as Basel III begins to bite.


  •      Credit Foncier’s issuance of €1 billion RMBS notes could reopen the French securitisation market;
  •      It included re-marketable securities, which permit the re-fixing of the coupon on the class A2 note series every five years;
  •      However, the deal has also sparked debate about the French mortgage market, in which guarantee-protected residential mortgage loans are a dominant feature.

"Constructive dialogue"

The deal included what are known as re-marketable securities. These permit the re-fixing of the coupon on the class A2 note series every five years, notwithstanding the long maturity of the underlying home loans.

In another first for the French market, Credit Foncier retained five percent of the nominal value of the loan portfolio to comply with the capital requirements regulation (CRR). "These assets were randomly selected by an independent expert to ensure a representative sample of the whole portfolio," Lewis told IFLR.

However, the deal has also sparked debate about the nature of the French mortgage market.

Concerns have been voiced about the guaranteed nature of 20% of the collateral pool of Credit Foncier’s deal. In contrast with loans backed by a legal mortgage, guaranteed loans do not qualify for the Prime Collateralised Securities (PCS) label, though Credit Foncier did not seek such a label in this issuance. 

"Historical default rates on loans guaranteed by specialist guarantee organisations are low"

It could also mean the deal isn’t eligible for the Basel Committee’s liquidity coverage ratio (LCR) criteria - the final version of which is yet to be published -  which state that RMBS must be backed by first-lien residential mortgages.

This type of residential mortgage loan accounts for more than half of the French market.

However, leading lawyers have queried the difference in treatment between the two loan types, which some fear will lead to a fragmentation of the market.

Some market participants have told IFLR that guaranteed loans should be assimilated to home loans secured by mortgage loans. "They should ultimately be given the same regulatory treatment and similar treatment by the PCS board," said one industry insider, who preferred to remain anonymous.

One lawyer has called for a constructive dialogue involving both the PCS other stakeholders about how French home loan guarantee organisations work.

"Historical default rates on loans guaranteed by specialist guarantee organisations are low," said the counsel. "They have to go through two credit approvals – one from the originating bank and another from the guarantee organisation."

Tear sheet

The €804 million senior notes, rated AAA/Aaa (by Fitch and Moody's respectively), were listed on the regulated market of the European Luxembourg Stock Exchange on May 27.

The prospectus is available here

Clifford Chance advised Credit Foncier as drafting counsel. Freshfield Bruckhaus Deringer advised joint lead managers Crédit Suisse, Natixis, JP Morgan, Lloyds Bank and the Royal Bank of Scotland.

Crédit Foncier was also advised by Herbert Smith Freehills, who conducted a legal review of the loans comprised in the portfolio.

Further reading

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Glimmers of hope for UK RMBS

Is US securitisation going back to 2005?

Can rental securitisation revive US housing?