As a société de crédit foncier, Caisse Française de Financement Local’s assets are financed through the issue of debt that is covered by a legal privilege guaranteeing them a priority right on the cash flows generated by the assets.
In addition to its equity, Caisse Française de Financement Local uses two categories of debt to finance its assets:
- debt benefiting from the legal privilege (covered bonds, defined by law as obligations foncières or other resources benefiting from the legal privilege by reason of their contract). Caisse Française de Financement Local thus issues registered covered bonds contractually benefiting from the legal privilege in the same way as obligations foncières;
- debt not benefiting from the legal privilege, which includes debt that is not covered by the assets and which, for this reason, is subordinated vis-à-vis debt benefiting from the legal privilege. Together with equity, it finances the Group’s over-collateralization. It may be of three types:
- mainly, debt negotiated according to the terms of a financing agreement signed with SFIL, CAFFIL’s parent company;
- if necessary, financing obtained from the Banque de France: as a credit institution, CAFFIL is entitled to participate, in its own name, in Banque de France refinancing operations. The financing obtained does not benefit from the privilege provided for by the legislation on sociétés de crédit foncier, but is guaranteed by assets pledged to the Banque de France. These pledged assets are excluded from the cover pool and calculation of the over-collateralization ratio;
- if necessary, financing obtained from credit institutions within the framework of repurchase agreements (repos). As is the case for financing obtained from the Banque de France, this financing is secured by assets pledged in favor of the credit institution. These pledged assets are excluded from the cover pool and calculation of the over-collateralization ratio.
The over-collateralization ratio, which is calculated on the basis of regulatory standards governing sociétés de crédit foncier, is the ratio between the assets and the resources benefiting from the legal privilege.
Caisse Française de Financement Local is obliged to maintain a minimum regulatory over-collateralization ratio of 105 %.
The rating agencies may require a higher level of over-collateralization. This requirement depends on the methodology applied and on the new assets and liabilities on Caisse Française de Financement Local’s balance sheet, and it may vary over time. Caisse Française de Financement Local takes these particular requirements into account in the management of its activities, in order to make sure they are always respected.
Quality of assets
Caisse Française de Financement Local has endeavored since its creation to ensure that its assets are of excellent quality.
The outstanding loans on CAFFIL’s balance sheet are mainly with public sector counterparties (local and sovereign entity exposures) as well as, more incidentally, bank counterparties (in order to invest its cash surpluses).
French exposures are predominant, accounting for more than 85% of its cover pool. They are diversified in terms of the number of counterparties (around 15,000 different customers), geographical distribution and customer type : regions, departments, cities, municipalities, intermunicipal public institutions, public health institutions and social housing bodies.
New loans granted under the partnership with LBP or arising from CAFFIL’s debt management activity are exclusively with French local public sector borrowers.
Refinancing loans for large export credits benefit from an irrevocable and unconditional 100% guarantee by the French State.
CAFFIL’s outstandings on foreign public sector counterparties account for less than 15% of total outstandings. These exposures are managed in a run-off mode since 2013.
CAFFIL’s low exposure credit risk is reflected in:
- the low level of arrears on its loans,
- its low level of non-performing and litigious loans per French accounting standards (less than 1% of the cover pool),
- the near-inexistence of observed losses since SFIL’s inception in 2013.
Liquidity risk is defined as the risk that the institution may not be able to find the necessary liquidity, on a timely basis and at a reasonable cost, to cover the financing needs related to its activity.
Caisse Française de Financement Local’s liquidity risk mainly reflects how able it is to reimburse certain debts benefiting from the legal privilege on a timely basis in the event of an excessive lag between the repayment of its assets and that of its debt benefiting from the legal privilege.
To meet its liquidity requirements, Caisse Française de Financement Local primarily uses cash flows from the amortization of cover pool assets or the issuance of new obligations foncières to replace the maturing bonds that give rise to the liquidity requirement when they are redeemed.
Furthermore, Caisse Française de Financement Local has a large stock of assets eligible for European Central Bank refinancing via the Banque de France. In addition to access to the central bank in its own name, Caisse Française de Financement Local can also mobilize certain of its assets by using interbank financing in the form of repurchase agreements. If necessary, these transactions would easily cover its cash flow requirements.
The aggregate maximum liquidity requirement that Caisse Française de Financement Local could face in the future in a run-off situation in which it was unable to issue new obligations foncières is lower than the maximum funding already occasionnely obtained on a one-off basis from the central bank in the past. It is also lower than the Caisse Française de Financement Local’s refinancing potential with the Banque de France, measured by the amount of eligible assets after haircut that would be available while complying with the minimum over-collateralization required by the regulations.
Caisse Française de Financement Local has its own autonomous resources that enable it to cover its temporary liquidity needs, even in the event of the default of its parent company, since any legal proceedings engaged for the bankruptcy or liquidation of its parent company cannot be extended to Caisse Française de Financement Local (article L.513-20 of the Monetary and Financial Code).
CAFFIL also manages its liquidity risk by monitoring and ensuring compliance with:
- the regulatory indicators specific to sociétés de crédit foncier (regulatory coverage ratio, weighted average term gap and projected cash requirements at 180 days),
- the regulatory liquidity indicators applicable to credit institutions, in particular the liquidity coverage ratio (LCR),
- internal indicators (stressed and unstressed short- and long-term liquidity projections, management coverage ratio, duration gap between assets and liabilities benefiting from the legal privilege, one-year survival horizon in stressed conditions, sensitivity of the net present value of the static liquidity gap, etc.).
Interest rate risk
Interest rate structural risk is defined as the risk of loss incurred in the event of a change in interest rates that would lead to a loss in value of balance sheet and off-balance sheet transactions, excluding any trading portfolio transactions. There are three different types of interest rate risk (the fixed interest rate risk, the basis risk and the fixing risk).
To limit its impact, interest rate risk is hedged in two stages by Caisse Française de Financement Local:
- In the first stage, all the assets and the liabilities benefiting from the privilege which do not naturally have a floating rate are hedged against Euribor until maturity as soon as they are recorded on the balance sheet. In practice, acquisitions of loan portfolios (in which the unit amount is generally small) are usually macro-hedged. Loans granted individually or bond issues can be micro- or macro-hedged. Hedging of assets and liabilities is more often obtained in using new interest rate swaps, but the same effect can also be obtained whenever possible by the cancelation of swaps of opposite direction.
- In the second stage, Euribor lending and borrowing flows (naturally or after hedges) are swapped against Eonia in order to eliminate the basis risk generated by differences in the tenor (Euribor 1, 3, 6 or 12 months) and the fixing risk due to refixing dates of reference indices that differ for the assets and the liabilities. The residual risk is managed using macrohedges with a management horizon of one week.
Non-privileged debt is not concerned by these hedging operations. In fact, debt contracted by Caisse Française de Financement Local with its shareholder to finance over-collateralization is borrowed either directly with a Eonia index and does not need to be swapped, or with a Euribor index and thus finances assets also indexed on Euribor. Short-term debt owed the Banque de France with a fixed rate (if any) is not hedged, but finances fixed rate assets.
These different types of interest rate risk are monitored, analyzed and managed through the production of gaps (fixed rate, basis and fixing), and/or net present value (NPV) sensitivity indicators. Limits provide a framework for this sensitivity and are designed to reduce the impact on the value of balance sheet items in the event of a shift in the yield curve or a move in sloping/rotation.
Information on CAFFIL’s interest rate risk management is available in the quarterly financial and activity reports.
Foreign exchange risk
The foreign exchange risk is defined as the risk of a loss, linked to a change in the exchange rate of currencies vis-à-vis a reference currency. The reference currency of Caisse Française de Financement Local is the euro. The foreign exchange risk reflects a change in the value of assets and liabilities denominated in a currency other than the euro by reason of fluctuations of this same currency vis-à-vis the euro.
Caisse Française de Financement Local ’s foreign exchange risk management policy is to incur no foreign exchange risk: it enters into cross-currency swaps against the euro for its issues and assets denominated in foreign currency, on initial recognition at the latest and until their final maturity, thereby ensuring that these balance sheet items’ principal and interest rates are fully hedged. Floating rate exposures generated by this management policy are incorporated into interest rate risk management. Nonetheless, certain loans to refinance large credit exports denominated in USD may cause a very limited risk of foreign exchange during their drawing phase. This residual risk is handled through the calculation of a very low sensitivity limit.
Information on CAFFIL’s foreign exchange risk management is available in the quarterly financial and activity reports.