Standard & Poor’s Ratings Services has assigned its ‘AAA’ long-term credit ratings to Societe Generale LdG Banque’s (SG LdG) covered bond program and its four inaugural issuances of “Lettres de Gage” (LdGs; Series 1, 2, 3, and 4; Luxembourgish legislation-enabled covered bonds). These four issuances total EUR900 million and are the first under SG LdG’s EUR10 billion medium-term note program. We have also assigned a ‘A-1+’ short-term rating to the covered bond program. The outlook is negative.
SG LdG is a covered bond bank regulated by the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourgish regulator. It is 100% owned by Societe Generale Bank & Trust (SGBT; A/Negative/A-1), which in turn is owned by Societe Generale (SG; A/Negative/A-1). The LdG program is a complementary funding tool for SG, allowing SG to refinance assets that are not eligible under its existing French Societe de Credit Foncier (SCF) and Societe de Financement de l‘Habitat (SFH) covered bond programs.
Key features of the covered bond program include:
-- SG LdG issued the LdGs, totaling EUR900 million, on Nov. 8, 2012.
-- The ratings assigned to this issuance reflect our level of comfort in the Luxembourgish legal framework for the issuance of covered bonds and the credit quality of the underlying assets and their cash flows, as well as our assessment of counterparty risk and country risk.
-- SG LdG has used the issuance proceeds to fund a secured loan facility to SG. SG will make payments on this loan facility that match payments due on the covered bonds. This structure creates a payment obligation of SG on the LdGs.
-- SG has pledged a portfolio of public-sector loans as collateral for this secured loan. The initial cover pool comprises loans to public-sector entities in France and Spain.
The covered bond rating process employed primarily follows the methodology and assumptions outlined in our “Covered Bond Ratings Framework” criteria, published on June 26, 2012.
We calculate the maximum potential uplift that the covered bond ratings can achieve from the issuer credit rating (ICR) on SG (A/Negative/A-1), to which we consider SG LdG to be a core subsidiary. According to our assessment of asset-liability maturity mismatch (ALMM) risk, we have classified ALMM risk as “low” and categorized the program in category ‘2’. Because the level of available credit enhancement is greater than the level of credit enhancement commensurate with the maximum six-notch uplift above the ICR, the covered bonds can achieve a ‘AAA’ rating.
We have assessed counterparty risk using our criteria articles “Counterparty Risk Framework Methodology And Assumptions,” and “Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions,” both published on May 31, 2012. These criteria are effective for covered bonds since July 12, 2012. We consider that counterparty risks in the transaction are mitigated in line with these criteria, and therefore counterparty risk does not reduce the maximum achievable rating on SG LdG’s covered bonds
Finally, we also consider country risk as set out in our criteria article “Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions,” published on June 14, 2011. We note that the initial cover pool has an exposure of 74.62% to French public-sector entities and 25.38% to Spanish public-sector entities. Our analysis of country risk pertaining to SG LdG’s cover pool is as follows:
-- Since the cover pool has a concentrated exposure to French public-sector assets, our criteria cap our ratings on the covered bonds at one notch above the sovereign rating on France, which is ‘AA+/Negative/A-1+’ at present. Therefore, French country risk does not currently limit our ratings on SG LdG’s covered bonds.
-- With an exposure to Spanish public-sector assets of 25.38% of the cover pool, Spanish country risk does not currently limit the rating on SG LdG’s covered bonds.
The negative outlook on SG LdG’s covered bonds reflects the negative outlook on our sovereign rating on France. If we were to downgrade France, we would downgrade SG LdG’s covered bonds as a result of our country risk analysis, all else remaining equal.
Today we have published a new issue report providing further detail of our analysis of this covered bond program.
We have assigned our ratings on these covered bonds based on our criteria for rating covered bonds (see “Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds,” published Dec. 16, 2009). The assumptions and methodologies used in the credit and cash flow analysis are currently under review (see “Advance Notice Of Proposed Criteria Change: Methodologies And Assumptions For Rating Certain Covered Bonds And CDOs,” published Aug. 5, 2010).
The scope of our review of the analysis of public-sector assets may include our default rate stresses, correlation assumptions, recovery levels, model risk, concentration limits, and credit enhancement levels. Further, as part of our cash flow analysis, we used Standard & Poor’s Covered Bond Monitor to calculate the target credit enhancement for the covered bonds. The assumptions and methodologies used in this cash flow analysis are also under review.
This review may result in further changes to the criteria. As a result, our future assumptions and methodologies may differ from our current criteria. The criteria change may affect the ratings on all outstanding covered bonds in this program. Until such time that we adopt new criteria for rating covered bonds, we will continue to rate and surveil these covered bonds using our existing criteria (see “Related Criteria And Research”).
-- Societe Generale LdG Banque (Series 1, 2, 3, And 4), Nov. 8, 2012
-- Covered Bond Ratings Framework, June 26, 2012
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012
-- Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
-- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads, April 24, 2012
-- Request For Comment: Methodology For Assessing Operational Risk In tructured Finance Transactions, Oct. 4, 2011
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Advance Notice Of Proposed Criteria Change: Methodologies And Assumptions For Rating Certain Covered Bonds And CDOs, Aug. 5, 2010
-- Methodology: Credit Stability Criteria, May 3, 2010
-- Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds, Dec. 16, 2009
-- Understanding Standard & Poor’s Rating Definitions, June 3, 2009
-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008
-- CDO Spotlight: Rating Approach To Synthetic CDOs Of Sovereigns Or Local And Regional Governments, May 3, 2006
-- Covered Bond Monitor: Technical Note, Feb. 14, 2006
-- Surviving Stress Scenarios: Assessing Asset Quality Of Public-Sector Covered Bond Collateral, Sept. 30, 2003
-- Criteria for Rating Luxembourg Lettres de Gage Publiques, Nov. 20, 2001
Societe Generale LdG Banque
EUR900 Million Lettres de Gage (EUR10 Billion Medium-Term Notes Program)
Class Rating Amount (mil. EUR)
Luxembourg legislation-enabled covered bonds (“lettres de gage”)
AAA/Negative/A-1+ Up to 10,000
Series 1 AAA/Negative 225
Series 2 AAA/Negative 225
Series 3 AAA/Negative 225
Series 4 AAA/Negative 225