The bond market (also known as the credit, or fixed
income market) is a financial market where participants
can issue new debt, known as the primary market, or buy
and sell debt securities, known as the Secondary market,
usually in the form of bonds.
The primary goal of the bond market is to provide a
mechanism for long term funding of public and private
Traditionally, the bond market was largely dominated by
the United States, but today the US is about 44% of the
market. As of 2009, the size of the worldwide bond market
(total debt outstanding) is an estimated $82.2 trillion.
The French covered bond market is the fourth-largest in
the world, with more than €360 billion outstanding in 2012.
Last year, French issuance of benchmark size (that is, with
a notional of at least €500 million) placed with investors
totaled more than €25 billion—the most of any country.
Despite the global issuance slowdown in 2013, covered
bonds remain a key funding tool for French lenders,
allowing them to diversify their funding mix and
strengthen their funding profiles.
Buyers in Asia and the Middle East were responsible for
half of net purchases of French government bonds in 2012,
with total non-resident holders of French debt reaching 62
Because of the specificity of individual bond issues, and
the lack of liquidity in many smaller issues, the
majority of outstanding bonds are held by institutions
like pension funds, banks and mutual funds.
1. Caisse de Refinancement de l'Habitat (CRH) bonds
2. Obligations foncières (OF)
3. Structured covered bonds
4. Obligations de Financement de l'Habitat (OFH)
5. Fonds Commun de Titrisation (FCT)
Caisse de Refinancement de l'Habitat (CRH), a type of
credit institution that is governed by a specific law, was the
first entity to issue covered bonds in the current format. It
was founded in 1985 exclusively to refinance banks'
housing loans. Originally backed by an explicit state
guarantee, CRH is now a private corporation whose
shareholding banks—Crédit Agricole S.A., Crédit Mutuel,
Société Générale, BNP Paribas, and BPCE—may contribute
covered bond collateral and issue CRH bonds in proportion
to their ownership.
Eligible assets are limited to residential mortgage loans,
state-guaranteed home loans, and third-party-guaranteed
home loans up to 35% of the collateral pool. Securitizations
are not allowed in the asset pool.
In 1999, new legislation broadened asset eligibility for
legislation-enabled covered bonds, allowing for the
issuance of "Obligations Foncières" (OF) by Sociétés
de Crédit Foncier (SCF), a new type of credit
OF collateral may include mortgage and public-sector
loans, some highly rated asset-backed securities (ABS)
backed by eligible assets, state-guaranteed real estate
loans, along with a limited amount of third-party
guaranteed home loans.
Despite the existence of these two legislative covered bond
frameworks, starting in the mid-2000s many domestic banks
opted to issue under common law contractual agreements (so-
called "structured“ covered bonds). A major reason for this was
that French lenders had increased their exposure to third-party-
guaranteed residential real estate loans.
Guaranteed lending rose to 53% in 2012 from 36% of volumes in
2001, according to Observatoire Crédit Logement/CSA. Many
would therefore have had difficulty refinancing their loan books
through OF or CRH, because of the cap on such assets. For OF,
this cap was 20% until 2007, when it was raised to 35%.
Furthermore, while assets remain on the balance sheet of the
originator when issuing CRH bonds, OF legislation requires
assets to be transferred to the SCF that issues the bonds—a
requirement that some lenders considered onerous.
The French government introduced a new legislative framework in
early 2011, and another type of credit institution—"Société de
Financement de l'Habitat“ (SFH)—which could issue "Obligations de
Financement de l'Habitat" (OFH). OFH can be backed by residential
mortgages and guaranteed home loans without limit, along with some
senior ABS. Under this legislative framework, the cover pool can also
remain on the balance sheet of the sponsor bank, while the OFH are
liabilities of the SFH.
SFHs with assets and liabilities on the same balance sheet are possible,
but to our knowledge none currently exists. The legislation enabled
structured covered bond issuers to convert their programs to OFH.
Most of the issuers that we rate have done so, in order to achieve
favorable regulatory treatment through compliance with Article 129 of
European Capital Requirements Regulation, and with Article 52 (4) of
the European directive on undertakings for collective investment in
transferable securities (UCITS).
The last type of structure existing today uses a "Fonds
Commun de Titrisation“ (FCT), a special-purpose company
established under French securitization legislation. In this
case, the issuer is not regulated as a covered bonds issuer.
The issuer's assets include financial receivables resulting
from the parent group's advances. The advances match the
terms and conditions of the covered bonds to ensure full
and timely payment under the covered bonds, which are
secured by French housing loans originated by a bank.
As with OFH, this type of structure makes use of the
implementation of the European financial collateral
directive in French law (Article L. 211-38 of the French Code
Monétaire et Financier).
Bond markets determine the price in terms of yield that a
borrower must pay in order to receive funding. The decorrelation
between French bond yields and France's economic
fundamentals could go on as long as investor sentiment towards
the country remains relatively positive.
The advantages of France's deep and liquid bond market - it
makes it easy to buy or sell, and its appeal as a safe credit offer
higher yields on its bonds than the United States, Germany
Some structured covered bond programs, as well as bonds issued
under some covered bond legislations, incorporate a feature that
proportionally allocates the program's credit enhancement to
each of the covered bond issues. In some programs this is
referred to as the selected assets required amount (SARA) clause.
Most of the structured and formerly structured French covered
bond programs that we rate feature a SARA clause.
Propose harmonization and calculation standards for the
Euro fixed income and derivatives instruments.
Carry out studies on those instruments and markets.
Issue recommendations in this domain for all kinds of
entities involved in fixed income instruments, such as
Issuers, Intermediaries, Financial Institutions, Investors,
Professional Associations, Market Authorities.
It is a non-for-profit organization, that is driven by the
objective of proposing very precise standards that
contribute to the transparency and the safety of the Euro
fixed income market.