1 european covered bonds : the french flair… stockholm thursday, march 29, 2007

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European Covered bonds : European Covered bonds : the French Flair…the French Flair…

Stockholm

Thursday, March 29, 2007

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HistoryHistory

1767 : Introduction in Prussia (Landschaften)

1900 : Codification of the modern Pfandbriefe market (“Hypotehkenbankgesetz”)

1988 : European UCITS Directive: Definition of “Covered Bonds” The issuer must be a credit institution The issuance of covered bonds has to be governed by a special legal framework The issuance of covered bond must be subject to special prudential public supervision The set of eligible cover assets must be defined by law The cover assets pool must provide sufficient collateral to cover bondholder claims throughout the

whole term of covered bond Bondholders must have priority claim on the cover assets pool in case of default of the issuer

1999 : Enforcement of the French Law

For over 200 years, no defaults have been documented

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100

150

200

250

Jan-98 Oct-98 Oct-99 Jan-01 Sep-02 Apr-04 Jun-05 Jun-06

bn

Deposit Liabilities

Loans for housepurchasing

Globalisation of the covered bond market Globalisation of the covered bond market

19991999

1999 1997

19971995

1998

19981995

1993

Legislation in countries of the

EU/EEA/CH

European credit institutions liquidity gap

Oustanding volume Jumbo covered bond

0

50

100

150

200

250

300

350

1995 1996 1997 1998 1999

France

Spain

Germany

bn

Jumbo covered bond issue volumes

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999

France

Spain

Germany

bn

4

2004

20072007

A strong predominance of specific domestic A strong predominance of specific domestic legislationslegislations

23

29

2

4

Legislation in countries of the

EU/EEA/CH

Legislation under

consideration

Legislation in future EU

member and further

countries in

4

Concrete legislation in preparation

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2007

1993

1999

2005

2005 1997

1995

19971995

1998

20031998

2000

2004

2006

2003

2002

2004

2004

2006

Structured covered bonds

2006

2007

bn

Oustanding volume Jumbo covered bond

0

100

200

300

400

500

600

700

800

900

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Other

IrelandFrance

SpainGermany

bn

Jumbo covered bond issue volumes

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

UKLuxembourgAustriaItalyNetherlandFinlandUSASwedenPortugalNorwayIrelandFranceSpainGermany

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Bonds spreads on March 20th

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

2006 2008 2010 2012 2014 2016 2018 2020 2022

BNPP

Poly. (OF)

Poly. (CRH)

Mortgage assets via RMBS senior tranches

Outstanding €14bn

2006 issuance €2.5bn

2007 plan €3 bn

Public sector/Local authorities assets

Outstanding €48bn


2007 plan €16 bn

Mixed assets: Public/Mortgage

Outstanding €64bn


2007 plan €20/25bn

The French flair….The French flair….

And 2 structured Bonds models

As of today, three existing « Société de Crédit Foncier »:

Assets: Mortgage

Outstanding €26bn


Assets: Mortgage

Outstanding €4.5bn


2007 plan €5/6 bn

Structured covered bonds

Obligations foncières

6

-3

-1

1

3

5

7

9

01

/01

/07

16

/01

/07

31

/01

/07

15

/02

/07

02

/03

/07

17

/03

/07

Wamu 10 ans B&B 10 ans OF 10 ans

The French model has proven its robustnessThe French model has proven its robustness

Performance against the others covered bonds assets classes The OFs are the most expensive notes among European bonds

Strong stability in credit crisis or market volatility contexts

German banking crisis

Flight to quality paper in case of credit crisis (GM)

US and UK structured bonds suffered from US sub-prime market turmoil

-5

0

5

10

15

20

janv

-00

mai

-00

sept

-00

janv

-01

mai

-01

sept

-01

janv

-02

mai

-02

sept

-02

janv

-03

mai

-03

sept

-03

janv

-04

mai

-04

sept

-04

janv

-05

mai

-05

sept

-05

janv

-06

mai

-06

sept

-06

OF 10 yrs Pfanbriefe 10 yrs

-6

-4

-2

0

2

4

6

8

01/0

7/20

03

01/1

0/20

03

01/0

1/20

04

01/0

4/20

04

01/0

7/20

04

01/1

0/20

04

01/0

1/20

05

01/0

4/20

05

01/0

7/20

05

01/1

0/20

05

01/0

1/20

06

01/0

4/20

06

01/0

7/20

06

01/1

0/20

06

01/0

1/20

07

150

200

250

300

350

400

15 per.Mov.Avg. Itraxx Xover

15 per. Mov. Avg. (IboxxFrance covered)

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The French Legal Framework: the best survivorThe French Legal Framework: the best survivor

Exclusive purpose of SCF

Geographical zone of the eligible assets: EEA countries,

Specialisation

Protection

No ALM Position

Strong Controls

Permanent mandatory over-collateralization

Bankruptcy remoteness from the parent company and a legal Privilège

Satisfactory level of congruence of rate

Satisfactory level of congruence of maturities

Contrôleur spécifique (special external auditor) + Commission Bancaire Legal Auditors

Rating Agencies

199

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8the French Legal Framework: a Darwinian the French Legal Framework: a Darwinian modelmodel

200

120

03

200

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Enlargement of eligible assets (both public sector loans and mortgage / guaranteed housing loans to USA, Canada, Japan and Switzerland

The transfer of receivables (including future receivables) on public debtors to an SCF is enforceable against third parties "notwithstanding the opening of insolvency proceedings against the originator".

The law will change soon with the implementation of the "equity capital" directive (revised EC directive 2000/12), as the implementation text further extends

the definition of eligible public receivables to all types of "exposures to or guaranteed by" public entities.

and the share of guaranteed housing loans raise from 20 to 35% of SCF

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A covered bond along UCITS directive definitionA covered bond along UCITS directive definition

Regulated covered bonds (Société de Crédit Foncier)

Structured Covered Bonds

Specific control / fiduciary supervision organized by law

Yes No - no specific controller/trustee and no special regulatory supervision

Eligible assets defined by a specific framework

Yes strict legal framework

No – pure contractual creation sui generis between the SPV and the borrower

Legal priority and preferential payment

Yes No – no specific provision in the law

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Annex

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European Covered Bonds Mix (1/3)European Covered Bonds Mix (1/3)

Germany France Luxembourg Spain Ireland

Name of bonds Pfandbriefe Obligations foncières (OF) Lettres de gage (LG) Cédulas Asset Covered Securities (ACS) Covered Bonds Issuers ‘pure’ mortgage bank, often a

commercial bank subsidiary, or “mixed” mortgage bank; or public sector issuer, ship mortgage bank

Special Purpose vehicle: société de crédit foncier –SCF-, which enjoys the status of a finance company, likely a bank subsidiary

lettres de gage issuing bank must be a mortgage bank

Generally a bank or a savings bank

Financial institution designated by the Central Bank of Ireland as a “mortgage credit institution” and/or “public credit institution”

Special banking principle No Yes Yes No Yes, limited (10% of assets)

Type of bond issued 2 categories: public (öffentliche) / mortgage

(hypotheken)

one category 2 categories: public-sector / mortgage

2 categories:public (cédulas territoriales CT) / mortgage (cédulas hipotecarias CH)

two categories: public-sector /

mortgage Structure of instrument Cover assets remain on the

mortgage bank’s balance-sheet, but they are segregated in two separate pools: mortgage and public sector

Cover assets (mainly loans granted by the SCF or sold by a parent-bank) are on the SCF’s balance-sheet, but remain consolidated by the parent

Cover assets remain on the LG issuing bank’ balance-sheet, but they are segregated in two separate pools: public sector and mortgage

Cover loans remain on the bank’s balance-sheet

Cover assets remain on the balance-sheet of the designated institution, but they are segregated in two separate pools: public sector and mortgage

Collateralisation structure Fungible: for each of the two categories of Pfandbriefe, the aggregate outstanding is backed by the aggregate amount of assets comprised in the corresponding pool

Fungible: the aggregate amount of OFs is backed by the aggregate amount of loans, whether of the same nature or not

Fungible: for each of the 2 categories of LGs, the aggregate outstanding is backed by the aggregate amount of assets comprised in the corresponding pool

Fungible: the aggregate amount of CHs is backed by the whole portfolio of mortgage loans, the aggregate amount of CTs is backed by the aggregate amount of public sector eligible loans

Fungible: for each of the two categories of ACS, the aggregate outstanding is backed by the aggregate amount of assets comprised in the corresponding pool

Nature of eligible real estate loans

First mortgage loans financing residential or commercial real estate

First mortgage loans or guaranteed loans financing residential or commercial real estate



First mortgage loans financing residential or commercial real estate (commercial limited to 10% of pool)

Eligible mortgage sector

loans

EEA, and Switzerland EEA, French overseas territories, G7

OECD (without any restriction) Spain EEA (no limits) + G7 (limited 15% of pool)

Eligible public sector loans EC, EEA, G7, EIB,EBRD, Worldbank

EEA, G7 OECD (without any restriction)

EEA EEA (no limits) +G7 (limited 15% of pool)

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Maximum LTV for mortgage

loans

60% loans with a greater ratio are limited to 20% of the mortgage loan portfolio for pure mortgage banks

60% for commercial real-estate 80% for residential real-estate (with conditions) 100% for State guaranteed loans SCFs are not allowed to grant loans beyond these ratios

60%

70% for commercial mortgages 80% for residential mortgages

60% for commercial mortgages 75% for residential real estate 80% on average for the issuing bank

Eligibility of MBS No Yes (EEA, G7) No No No Substitute collateral Up to 10% of total

outstanding Pfandbriefe Up to 20% of SCF’s assets (30%

on temporary dispensation) For both pools, up to 20%

of the outstanding LGs No For both pools, up to 20% of

the pool’s total assets Minimum Over-

collateralisation

Yes, 2% minimum over-collateralisation

Yes, mandatory, amount not set by law: sum of risk weighted

assets must be higher than the total amount of preferential

resources(OF and hedging tools)

Yes, in practice But not required by law (1-

for-1 requirement)

Yes, mandatory A 11% minimum for CHs A 43% minimum for CTs

Prudent market value of the cover assets must be higher than the outstanding volume of ACS

Possibility of early loan

repayment

Yes, but penalty fine is prohibitive

Yes Yes Yes Yes

Protection against

mismatching (incl interest

rate currency and maturity risks

Yield of cover assets must be at least as high as the interest paid on Pfandbriefe Maturity of mortgage Pfandbriefe should not exceed the maturity of the cover assets Net present value loss due to a shift or twist in the yield curve by 100bp should not exceed 10% of the company’s equity(traffic light model)

No quantitative requirement, but congruence checked by the specific auditor Currency mating between cover assets and OFs is required Each time a SCF issues a Jumbo OF its external auditor has to insure that the SCF manages properly its interest rate and maturity risks.

Cover requirement in terms of interest Currency risks must be hedged

Not required by law Duration of the ACS must not be higher than the duration of the assets in the cover pool and the duration of the cover pool must not be more than three years higher than the ACS duration, Interest receivable on the assets in the cover pool in a given period of twelve months must be higher than the interest payable on ACS that period

Public oversight on a regular basis

Banking regulator (BAFin) & security trustee

Banking regulator (Commission Bancaire) & specific independent auditor

Banking regulator Banking regulator (Bank of Spain)

Banking regulator (Central Bank of Ireland) & Cover Asset Monitor

Preferential claim in the event of issuer bankruptcy

Yes on all assets of the cover pool, before any other creditor, up until their full repayment; if they are insufficient, the Pfandbriefe holders have a legal claim on the issuer’s other assets, pari passu with the senior debt holders

Yes on all the SCF’s assets, before any other creditor, until they have been fully repaid

Yes on all the assets of the cover pool, before any other creditor, up until their full repayment; if they are insufficient, the LG holders have a legal claim on the issuer’s other assets, pari passu with the senior debt holders

Yes, on the total mortgage portfolio/eligible public

sector loan portfolio, before any other creditor except for

the tax authorities and the employees. If mortgages

/ eligible public sector loans are insufficient, the CH/CT holders have a lien on the

other assets, pari passu with other creditors.

Yes on all the assets of the cover pool, before any other creditor, up until their full repayment; if they are insufficient, the ACS holders have a legal claim on the issuing bank’s other assets, pari passu with the senior debt holders

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Bankruptcy segregation of

the instrument in case of issuer’s default

Yes: the Pfandbriefe and the

collateral assets are isolated

Yes: the OFs and the collateral

assets are isolated

Yes: the LGs and the collateral

assets are isolated

No: Propagation of an issuer’s

default to the CHs/ CTs

Yes: the ACS and the collateral

assets are isolated

Bankruptcy segregation

from the parent

Yes Yes No No Yes

Repayment of bonds on their contractual date, even

should the issuer default

(= no acceleration of

payment)

Yes Yes Yes No Yes

Hedging derivatives:

inclusion in the collateral

and benefit from the privilege

Yes, limited to 12% of pool Yes Yes No Yes

Ceiling of the outstanding

bonds

None

None 60 x equity 90% of eligible loans for CHs 70% of eligible loans for CTs

50 x equity

Compliance with Article 22-4 of the 1985 ED on

investment

Yes Yes Yes Yes Yes

Risk weighting 10% 10% 10% 10% 10%

Upper limit on one single issuer for UCITS (according

to the 1985 ED)

25% (20% in Germany)

25% (25% in France)

25% (25% in Luxembourg)

25% (10% in Spain)

25%

Upper limit on one single issuer for insurers

(according to the 1990 and

1992 EDs)

40% (30% in Germany)

40% (10% in France)

40%

40% (10% in Spain)

40%

Eligibility for refinancing at the ECB (Tier 1 category)

Yes Yes Yes Yes Yes

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DisclaimerDisclaimer

This document has been prepared by Société Générale for information purposes only.

Société Générale does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon statistical services or other third party sources.

1 european covered bonds : the french flair… stockholm thursday, march 29, 2007

Documents

european covered bonds

covered bond market

eligible cover assets

bonds assets classesthe

5bn2006 issuance

lawthe cover assets

european ucits directive

uk structured bonds