Action concludes review; dated subordinated debt downgraded to A1, hybrid instruments to A3 (hyb)
Paris, April 15, 2013 -- Moody's Investors Service has today downgraded Credit Logement's
issuer rating to Aa3 from Aa2 and at the same time the rating agency downgraded
the issuer's dated subordinated debt rating to A1 from Aa3 and hybrid
debt ratings to A3 (hyb) from A2 (hyb). The outlook is stable on
all ratings.
The downgrade of the long-term issuer rating to Aa3 from Aa2 reflects
our assessment of the issuer's intrinsic financial strength in light
of (1) the potential for higher default rates and higher loss severity
on its guaranteed home loans, given the current macroeconomic downturn
and the slowdown of the French housing market; and (2) the deterioration
of the average creditworthiness of the main counterparties to which Credit
Logement is structurally exposed through its investment portfolio.
These pressures are partly mitigated by Credit Logement's prudent
underwriting and strong loss absorption capacity as well as by the implementation
of a more prudent investment policy which ultimately have resulted in
the downgrade of the institution's ratings by only one notch.
Credit Logement's long-term issuer rating reflects Moody's
opinion of the ability of the entity to honour senior unsecured financial
counterparty obligations and contracts, notably the claims on guaranteed
home loans.
This action concludes the review for downgrade initiated on 23 February
2012 and extended on 6 August 2012.
RATINGS RATIONALE
-- DOWNGRADE OF THE LONG-TERM ISSUER RATING TO Aa3
Credit Logement's long-term issuer rating has been downgraded
to Aa3 from Aa2, reflecting Moody's assessment of the issuer's
intrinsic financial strength.
1) Key role and dominant market position within the French banking sector
Moody's views Credit Logement's franchise as a credit strength
given its established leadership position as provider of housing-loan
guarantees, its strong value proposition for French banks active
in domestic home financing and the attractiveness of guaranteed loans
versus traditional mortgages in France. The share of home loans
that Credit Logement guarantees has continued to grow and at the end of
2011, around a quarter of outstanding domestic home loans were guaranteed
by Credit Logement.
2) Prudent underwriting and very strong shock absorbers as mitigants to
the expected rise in credit risk in the French home loan market
With EUR224 billion of outstanding guarantees at end-2011,
Credit Logement is heavily exposed to the French home-loan market.
Although the performance of French home loans has stood up well thus far,
we see the potential for credit losses to rise as a result of (1) a higher
probability of default, stemming from the structural rise in unemployment,
and which will be only temporarily compensated by the unemployment benefits;
and (2) a higher loss severity on defaulted loans, resulting from
the likely contraction in house prices in France overall in 2013 and possibly
beyond, which follows a period of steep house price appreciation.
However, Moody's considers that Credit Logement is well positioned
to withstand the expected deterioration in the performance of home loans,
as highlighted by its prudent underwriting and sound risk management,
and its strong capital buffers. Credit Logement's loss absorption
capacity is enhanced by its ability to externalise credit losses on guaranteed
home loans by allocating them to its Mutual Guarantee Fund, which
amounted to EUR3.5 billion at end-2011.
3) Correlation between financial strength and investment portfolio
Credit Logement's intrinsic financial strength is inherently correlated
to the credit quality of its investment portfolio, according to
Moody's. This portfolio, which is concentrated on a
limited number of counterparties, amounted to EUR8.5 billion
of interbank exposures at end-2011, equivalent to around
160% of Credit Logement's Tier 1 capital. Moody's
believes that investment risks embedded in the portfolio have increased
because of the high counterparty and industry concentration and deterioration
in the counterparties' creditworthiness -- which are Credit
Logement's main shareholders -- since the beginning of the
crisis.
However, Credit Logement has recently adopted significantly lower
investment limits and has introduced a mechanism to protect the deposits
made at its partner banks by means of collateralization. Moody's
believes that these measures, which will likely be fully effective
by end-June 2013, will result in a significant reduction
of the risks in this portfolio, through (1) higher portfolio granularity;
and/or (2) a reduction of the loss severity, if any counterparty
were to default.
Currently, the credit enhancement resulting from the adoption of
the aforementioned measures mitigates the impact of the deterioration
of the average credit quality of the portfolio (in particular as a result
of lower ratings recently assigned to Credit Logement's partner
banks), in Moody's view. However, Moody's
says that future deterioration of the counterparties' credit quality
could exert pressure on Credit Logement's intrinsic financial strength.
-- DOWNGRADE OF DATED SUBORDINATED DEBT AND HYBRID DEBT
RATINGS
The dated subordinated debt and hybrid debt ratings were downgraded by
one notch to A1 from Aa3 and A3 (hyb) from A2 (hyb), respectively.
The downgrade reflects Moody's re-assessment of the intrinsic
financial strength of the institution.
The dated subordinated instruments are rated one notch below the institution's
long-term issuer rating, to reflect their subordination in
case of liquidation. Credit Logement's hybrid instruments
are rated three notches below its long-term issuer rating,
to reflect (1) their deeply subordinated claim in liquidation; and
(2) the mandatory coupon-skip mechanism tied to a capital deficiency
event, or a regulatory notification trigger.
-- RATIONALE FOR THE STABLE OUTLOOKS
The outlook is stable on all ratings, and reflects Moody's
view that Credit Logement is well positioned to withstand a potential
deterioration in the performance of its guaranteed loan portfolio under
our central scenario. The stable outlook on Credit Logement's
ratings is also driven by Moody's expectation that the credit quality
of the investment portfolio will be resilient, as reflected by the
stable outlook on the ratings of most of Credit Logement's counterparties.
WHAT COULD MOVE THE RATINGS UP/DOWN
An improvement in the intrinsic financial strength of Credit Logement
could develop following a reduction of the risks on its guaranteed loan
portfolio or a material improvement in the institution's loss-absorption
capacity.
A severe deterioration of the performance of the French housing market
or of Credit Logement's guaranteed home loan portfolio could exert
pressure on its intrinsic financial strength. The institution's
intrinsic financial strength could also come under pressure if its loss-absorption
capacity or franchise value deteriorated. In addition, a
deterioration of the credit quality of its asset exposures or an adverse
change in its investment policy could also exert negative pressure on
Credit Logement's intrinsic financial strength.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Moody's Global Methodology
for Rating Mortgage Insurers, published in December 2012.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Stephane Herndl
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Credit Logement to Aa3; outlook stable
