OREANDA-NEWS. Fitch Ratings has affirmed Zephyr Home Loans FCT (Zephyr HL FCT)'s EUR1bn notes at 'AAA' with a Stable Outlook.

KEY RATING DRIVERS

The 'AAA' rating is based on Banque Federative du Credit Mutuel's (BFCM) Long-Term Issuer Default Rating (IDR) of 'A+', the holding company and funding arm of CM11, which acts as reference IDR for this programme, an unchanged IDR uplift of two notches, an unchanged Discontinuity Cap (D-Cap) of eight notches (minimal risk) and the programme's contractual asset percentage (AP) of 78.4%. The latter provides more protection than the revised 79.0% 'AAA' breakeven AP. The Stable Outlook on the notes reflects that on BFCM's IDR and for French residential asset performance.

Fitch's 'AAA' breakeven AP for the notes has decreased to 79.0% from 80.0%, based on slightly higher modelled credit losses. It is equivalent to a 26.6% breakeven overcollateralisation (OC). It considers a two-notch recovery uplift above a 'AA' tested rating on a probability of default basis defined as BFCM's IDR adjusted by the IDR uplift. Timely payment is assumed at a 'AA' rating level irrespective of the actual level of AP protection available.

The 26.6% 'AAA' breakeven OC is driven primarily by the credit loss component of 24.0% resulting from the asset analysis compared with 22.6% previously. This is explained by the higher proportion of security types other than first rank mortgages and guarantees (94% at end of March 2016 compared to 91% at end of March 2015). The asset disposal loss component of 9.7% reflects the cost associated with a stressed valuation of the cover pool under an assumed liquidation of the FCT. Finally, the positive cash flow valuation component (5.4%) reflects the negative excess spread between floating rate assets (after swap) and liabilities.

The unchanged D-Cap of eight notches remains driven by the pass-through amortisation of the notes that would be triggered by an event of default of BFCM and by the presence of sufficient protection against interest payment interruption risk for the programme, leading to a minimal discontinuity risk assessment.

The unchanged IDR uplift of two notches reflects Fitch's view that resolution by other means than liquidation is likely for CM11and that protection provided by the senior unsecured debt of CM11 is in excess of 5% of total adjusted assets.

The following criteria variation was applied during the analysis of this programme. In its asset analysis, Fitch assumed a 15% recovery rate for loans secured by a security type other than a first rank mortgage or a guarantee provided by a credit institution or an insurance company (0% recovery rate in the case of self-employed borrowers). We assumed a 0% recovery rate for loans with no security. In the absence of variation, the rating of the notes would be 'AA+'.

RATING SENSITIVITIES

The rating of the notes would be vulnerable to a downgrade if any of the following occurs: (i) Banque Federative du Credit Mutuel's Issuer Default Rating is downgraded by nine notches to 'B+' or lower; (ii) the sum of the Issuer Default Rating uplift and the Discontinuity Cap falls to one notch or below; or (iii) the programme's maximum contractual asset percentage (AP) exceeds Fitch 'AAA' breakeven AP of 79.0%.

Fitch's breakeven AP for the rating will be affected, among others, by the profile of the cover assets relative to outstanding notes, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the rating cannot be assumed to remain stable over time.