ANTIQUES SHOPS

July 26 - Fitch Ratings has affirmed Vauban Mobilisations Garanties' (VMG) outstanding bonds at 'AAA'. The bonds total EUR3.15bn and have scheduled maturity dates between end-July 2012 and January 2017.

The 'AAA' rating of VMG's bonds is based on Credit Foncier de France's (CFF; 'A+'/Stable/'F1+' ) Long-term Issuer Default Rating (IDR) of 'A+', as CFF acts as the main debtor of recourse for the underlying medium-term notes refinanced through VMG, and a Discontinuity Factor (D-Factor) of 6.5% assigned to VMG's programme. This combination could have allowed VMG's bonds to attain 'AAA' on a probability of default (PD) basis. However, Fitch has limited the maximum PD uplift to 'AA+' in-line with the PD rating of the Obligations Foncieres (OFs) issued by Compagnie de Financement Foncier (CoFF, a Societe de Credit Foncier also set up by CFF) due to the material exposure of VMG towards the CoFF OFs in which VMG has invested as part of the issue redemption reserve. Finally, as per Fitch's covered bonds rating criteria, the 'AAA' rating is further based on outstanding recoveries as calculated by Fitch given a default on the bonds, which allows for a one-notch recovery uplift to 'AAA' from the 'AA+' PD rating of the bonds issued under the programme.

The 'AAA' rating of VMG's bonds may be affected by a downgrade of the 'AAA' rating of the CoFF OFs, and is further linked to the credit quality of the Fonds Commun de Creances (FCC, a special purpose entity established under French law) senior units, which form part of VMG's assets.

The 6.5% D-Factor assigned to VMG's programme is mainly driven by the partial pass-through feature of VMG's bonds in combination with the dynamically calculated reserves to bridge upcoming mismatches that may arise between amounts received on the amortising senior FCC units and amounts due as interest and principal payments on VMG's bonds. No assets are required to be liquidated post an assumed default of the main debtor of recourse. The D-Factor further reflects the satisfactory segregation of the FCC senior units and reserves from the bankruptcy estate of CFF, despite the fact that VMG is not legally immunised against CFF's bankruptcy extension risk, and the feasibility of the programme's transition to an alternative asset manager in case of bank insolvency. It also takes into account the lack of special supervision from the French banking authorities.

VMG's D-Factor also takes into account the absence of hedging agreements, which simplifies the task of the alternative manager after issuer insolvency, and avoids additional liquidity constraints due to potential termination payments to defaulting swap counterparties.

In line with Fitch's covered bonds counterparty criteria, CFF must be replaced as account bank at the loss of 'A' or 'F1' within 30 days of becoming ineligible. In addition, to preserve VMG's ability to pay timely interest on its bonds, even in case of a jump to default of CFF, the remuneration provision, totalling EUR96m as of end-April 2012, is invested with an eligible counterparty outside CFF's banking group.

VMG is a 100% non-bank subsidiary of CFF, which was created in 1997. Its sole purpose is to refinance French residential loans originated by entities of the CFF group, which are first securitised via a FCC. In order to purchase the FCC senior units, VMG benefits from a subordinated loan granted by its parent. In parallel, the proceeds of VMG's bond issuances are on-lent to CFF, in the form of medium-term notes mirroring the term of VMG's bonds. CFF's obligation under the medium-term notes constitutes the primary source of interest and principal payment for VMG's bonds. Consequently, CFF's IDR constitutes a floor for the PD rating of VMG's covered bonds.

Should CFF default on its obligations under the medium term notes, VMG bonds (originally bullet) convert to pass-through, and are redeemed sequentially using the proceeds of the amortising FCC senior units, in combination with the reserves.

As of end-April 2012, VMG's assets comprised the FCC senior units, totalling EUR1.20bn, and the issue redemption reserve, which covers for upcoming mismatches between VMG's bullet bonds and the amortising FCC senior units. Of the EUR1.95bn issue redemption reserve, EUR1.5bn has been invested in CoFF OFs, whereas the remaining EUR447m is invested in an eligible account bank subject to replacement triggers upon downgrade. As this amount of EUR447m is less than what is due on VMG's liabilities over the next 12 months, Fitch does not view this as an excessive exposure to the parent, in-line with its covered bonds counterparty criteria.

All else being equal, VMG's bond ratings could be maintained at 'AAA' provided CFF is rated at least 'BBB-'. However, on 30 May 2012 Fitch published a report entitled "Exposure Draft: Global Covered Bonds Rating Criteria". The report proposes enhancements to the covered bonds rating criteria in order to increase transparency and reflect Fitch's updated views of systemic risk and cover pool liquidity. Fitch anticipates there will be no negative impact on VMG's covered bond ratings if the exposure draft proposals were implemented as proposed.