20110222 Credit Agricole Covered Bonds

Credit Focus CREDIT RESEARCH / COVERED BONDS 22 February 2011

research.ca-cib.com Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request.

Overview of covered bond legal frameworks

Contents

Risk factors and life cycle of a covered bond

Main issuance structures in the covered bond market

What the agencies think – comparing ratios per country

Country sections

Risk factors and life cycle of a covered bond Risk factors affecting covered bonds pre and post insolvency Pre issuer insolvency Post issuer insolvency Post covered bond insolvency Credit risk of the issuer Legal/structural risk in segregation process Asset risk (NPLs, recoveries) Supervision (general + special) Pool management risk Market risk Asset eligibility criteria (conflicts of interest if only one administrator

for the bank + covered bonds) Counterparty risk (derivatives, liquidity support)

Underwriting standards Supervision (special) Cover pool servicing (ie, treatment of NPLs)

Counterparty risk (derivatives, liquidity support)

Counterparty risk Market risk Market risk (any limits?) Liquidity risk (cash reserves, access to

funding post insolvency, etc.)

Liquidity risk (any limits?) Asset risk (NPLs, recoveries) Source: Crédit Agricole CIB

Life stages of a covered bond

Coupon payments + redemptions

Other liabilities +

equity

Structure post issuer insolvency

Other liabilities +

equity

Other assets

Structure pre issuer insolvency Structure post covered bond insolvency

Cover poolCovered

bonds

Florian Eichert, CFA, Senior Covered Bond Analyst +44 (0)20 7214 6402 [email protected]

Source: Crédit Agricole CIB

Cover poolCovered

bonds

Other assets

Cover poolCovered

bonds

Other liabilities +

equity

Covered bond investors

Bank (issuer) Other assets


Cover pool

Adminis-trator

Insol-vency

Adminis-trator

Separation Separation

Coupon payments + redemptions Recovery


Default. Payments have stopped, investors receive the recoveries

Cover pool

Adminis-trator

Insol-vency

Adminis-trator

No default. Payments are made as scheduled

Credit Focus

22 February 2011 2

Main issuance structures in the covered bond market Universal bank model

Traditional issuance model with the segregation taking place on the balance sheet of the issuer

This is the traditional covered bond issuance model. Cover pool business is done alongside non-eligible banking business. The issuer segregates the cover pool on balance. In the event of insolvency, the pool and outstanding covered bonds are separated from the ordinary insolvency estate. This way of issuing covered bonds is in use in the following countries:

Austria, Denmark (not the case for mortgage banks though), Finland, Germany, Portugal, Spain, Sweden

Structural diagram: universal bank model


Investor

Bank

Equity + other liabilities

Other assetsOver-

collaterali-sation

Strengths:

Covered bond investors have a residual claim on the remaining assets of the bank pari passu to senior unsecured creditors should the cover pool not be sufficient to cover all claims

Main challenges:

Clear segregation of cover pool assets on balance sheet

Clear separation of cover pool assets plus covered bonds post insolvency of the issuer

Specialised bank model Specialised banks which are subsidiaries of universal banks issue covered bonds. The cover pool assets are transferred to these issuers from their parents. In the event of insolvency of the mother company, the issuer ideally stays solvent. It can still operate as a normal bank, only the steady inflow of new cover assets has stopped. This way of issuing covered bonds is in use in the following countries:

Denmark (in the case of mortgage banks), Finland, France, Ireland, Luxembourg, Norway

Subsidiaries of universal banks issue

Issue

Covered BondsSubstitute assets

Cover assets

Security

Credit Focus

22 February 2011 3

Structural diagram: specialised bank model


Strengths:

No potential for commingling of cover pool assets and the remaining assets on balance sheet of the issuer as the separation has already taken place

Ideally, the issuer survives the insolvency of the mother company and remains a fully functioning entity

Main challenges:

Funding of the OC. If done through the mother company, insolvency of the mother company could automatically lead to insolvency of the issuer

Usually no claim on the mother company’s assets – the residual unsecured claim is limited to the issuer’s balance sheet

Operating in a post-insolvency scenario if the issuer has no or nearly no staff

SPV guarantees issuance by a universal bank model This way of issuing came up with the first UK covered bonds by Bank of Scotland. A universal bank issues bonds which are in turn guaranteed by an SPV, to which the cover assets are transferred through an equitable assignment. In the event of insolvency of the issuer, the cover assets remain with the SPV, which pays covered bond holders from the cash flows generated by the pool. This way of issuing covered bonds is in use in the following countries:

Italy, Netherlands, UK

Structural diagram: SPV guarantees universal bank issuance model


Universal bank issues, SPV guarantees

Mortgage Bank

Equity + Sub liabilities

Cover assets

Covered Bonds Issue Investor

Over-collaterali-

sation

Assets incl. shares in Mortgage Bank

Liabilities

Bank

If loans are originated by the mother, sale and transfer of cover assets

Security

Bank


Other assets

Cover assetsCovered Bonds Issue

Over-collaterali-

sation

Guarantee

Cover assets

Investor

Sale through equitable assignment

Liabilities

SPV

Credit Focus

22 February 2011 4

Strengths:

No potential for commingling of cover pool assets and the remaining assets on balance sheet of the issuer as the separation has already taken place pre insolvency of the issuer

Covered bond investors have a residual claim on the remaining assets of the bank pari passu to senior unsecured creditors should the cover pool not be sufficient to cover all claims

Main challenges:

Liquidity generation post insolvency as the assets are held by an SPV, which can rely only on the cash flows that are generated by the cover assets and the trustee selling assets from the pool

What the agencies are thinking – comparing ratios per country Fitch

D-Factor measures the delinkeage between issuer and covered bond

The D-Factor from Fitch measures the degree of delinkage between issuer and covered bond. In short, it states the probability with which Fitch expects the covered bonds to go into default following an issuer default. It can range from 0% to 100%. The quality of the legal framework plays a major role in this; however, market-related factors such as ALMM mismatches are also relevant. For example, the agency evaluates not only the law as such but also the likelihood with which issuers can actually make use of legal provisions such as issuing new bonds or taking out loans to bridge liquidity gaps. This is one of the main reasons why Portuguese D-Factors have been increased significantly in the course of the recent months, for example, even though the law did not change.

Minimum, mean and average D-Factors per country, as at 03/02/11

0%

25%

50%

75%

100%

CA

N

CH

E

DE

U -

PS

DE

U -

M

DN

K

ES

P

FRA

- P

S

FRA

- M

GB

R -

PS

GB

R -

M

GR

C

IRL

- PS

IRL

- M ITA

LUX

NLD

NO

R

NZL

PR

T - P

S

PR

T - M US

A

Mean

Source: Fitch, Crédit Agricole CIB

Moody’s

Moody’s TPI is the agency’s opinion about timely payment on covered bonds after the default of the issuer

Moody’s Timeliness Payment Indicator gives the agency’s opinion about timely payment on covered bonds after the default of the issuer. It is quite similar to Fitch’s D-Factor only that Moody’s does not express it in percentage terms but classifies covered bond programmes into six categories. As with Fitch, the legal framework is only the starting point. Pool characteristics also play a role, which is why different programmes in one country can have different TPIs.

That TPIs can also change over time became very obvious with Irish Mortgage ACS being shifted to the ‘very improbable’ bucket recently. Only in October 2010, Moody’s still had a TPI of ‘probable’ for Mortgage ACS.

Credit Focus

22 February 2011 5

Average TPIs of jumbo covered bonds per country Very high High Probable / High Probable Improbable Very Improbable

Austria (Public Sector) France (Obligations Foncieres) Austria (Mortgage) Portugal GreeceGermany (Public Sector) Germany (Mortgage) Denmark Hungary

Ireland (Public Sector ACS) Finland Ireland (Mortgage ACS)Norway France (Structured)Spain (Cedulas Territoriales) Italy

NetherlandsSpain (Ced. Hip.)SwedenSwitzerlandUK

Source: Moody’s, Crédit Agricole CIB

S&P

S&P categories take into account the strength of the law as well as the significance of covered bonds to that specific economy

S&P categorises covered bond markets into covered bond categories. Besides the quality of the legal framework, it also incorporates systemic importance (ie, the size and history of the respective markets). A fairly new market will therefore never be able to get into category 1 irrespective of the quality of the law. The size and history argument is also a main reason for Spain to be in category 1 even though we would rate the quality of the legal framework as being below average in a European context. As opposed to the Fitch and Moody’s ratios above, S&P’s covered bond categories don’t differ between issuers from a given country. Cover pool specific factors are addressed through the asset liability mismatch (ALMM) risk score.

Covered bond categories by country

Category 1 Category 2 Category 3Jurisdictions Denmark Canada Greece

France ("Obligations Foncières") Finland U.S.Germany France ("Structured Covered Bonds")Spain Ireland

ItalyLuxembourgThe NetherlandsNorwayPortugalSwedenU.K.

Maximum potential number of notches uplift from the ICR

5 to 7 4 to 6 3 to 5

Source: S&P, Crédit Agricole CIB

Credit Focus

22 February 2011 6

Austria – Pfandbriefe + Fundierte Schuldverschreibungen Issuance structure and overview

Issuance structure Pfandbriefe Source: ECBC, Crédit Agricole CIB

Investor

Substitute assets

Bank


Other assets

Mortgage cover assets

Hypotheken-pfandbriefe

Issue

Security

Over-collaterali-

sation

Public sector cover assetsOver-

collaterali-sation

OeffentlichePfandbriefe

Substitute assets

IssueSecurity

Legal basis Mortgage Banking Act (1899, last amended: 2005)

Law on Secured Bank Bonds (1905, last amended: 2005)

Mortgage Bond Act (1927, last amended: 2005)

Legal framework strengths Conservative valuation of mortgage assets through the use of the mortgage

lending value and 60% LTMV limits

Strong involvement of the supervisory authority both pre and also post insolvency

Separate administrator for the cover pool / covered bonds post insolvency

Legal framework weaknesses Covered bond investors have a claim only on the first 60% of the LTMV

All three laws prescribe only nominal 2% overcollateralisation of outstanding covered bonds

Credit Focus

22 February 2011 7

Overview of legal framework

Product Austrian Covered BondsStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution with a special licenceWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Residential + Commercial)Geographical scope Mortgage assets + Public sector assets: EEA, CHMixed pools possible? NoLimit on substitute assets 15%ValuationMaximum LTVs Commercial, Residential, Agricultural: 60%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes

Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?

No

ALM guidelinesMinimum OC 2%Type of coverage test NominalIs OC above the minimum protected? YesMitigation of market risk Natural matching + stress testingMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly or

via a special administratorInvolved in transfer of cover assets + covered bonds to another credit institution

Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?

Yes

How can liquidity be generated post insolvency (of the mother company)?

Cash flows from the pool, sale of cover assets, take out loans

Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? YesUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.pfandbriefforum.at

Source: ECBC, Crédit Agricole CIB

Credit Focus

22 February 2011 8

Denmark – Saerligt Daekkede Obligationer Issuance structure and overview

Issuance structure through specialised mortgage banks

Issuance structure through universal banks

Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB

Legal basis Danish Act on covered bonds (2007)

Legal framework strengths Very strict matching principle between assets and liabilities

Under the general balance principle, OC requirements are linked to the amount of risk (interest, currency, option and liquidity risk) in the pool


Administrator can access liquidity post insolvency of the issuer by taking out loans

Legal framework weaknesses No separate, independent cover pool monitor (monitoring is done by the

issuers themselves as well as the Danish FSA)

Fairly wide geographical scope for cover assets

Investor

Capital centre A

Mortgage Bank

Equity (8% of RWA)

Investor

Capital centre A

Universal Bank


Other assets

All SDOs backed by capital centre A

Issue

Security

Over-collaterali-

sation

Over-collaterali-

sation

All SDOs backed by capital centre X

Capital Center X

IssueSecurity

All SDOs backed by capital centre A

Issue

Security

Over-collaterali-

sation

Over-collaterali-

sationAll SDOs backed by

capital centre X

Capital Center X

Issue

Security

Equity (8% of RWA)

Credit Focus

22 February 2011 9


Product Saerligt Daekkede ObligationerStructureWhat is the legal basis? Special lawWho is the issuer? Specialised mortgage banks as well as universal credit institutions

with a special licenceWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Residential + Commercial)Ship loans (not eligible in the case of mortgage banks)

Geographical scope Mortgage assets + Public Sector assets: EEA, CH, USA, Canada, Japan, OECD, NZ, AUS

Mixed pools possible? YesLimit on substitute assets 15%ValuationMaximum LTVs Commercial: 60%, Agricultural: 60%, Ships: 70%,

Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


Yes

ALM guidelinesMinimum OC 0% (8% of risk weighted assets for mortgage banks)Type of coverage test NPV + Stress testIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk “Natural” matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly or

via a special administratorIs there an independent cover pool monitor? NoSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?

Yes

How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assets, take out loansRecourse to the credit institution's insolvency estate? Yes, pari passu (senior in the case of mortgage banks) to senior

unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? YesUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.realkreditraadet.dk


Credit Focus

22 February 2011 10

Finland – Finnish Covered Bonds Issuance structure and overview

Issuance structure through specialised mortgage banks

Issuance structure through universal banks


Legal basis Covered Bond Act / CBA (688/2010)

Legal framework strengths Conservative LTV limits

10% limit on commercial mortgages

Strong involvement of the supervisory authorities both pre and also post insolvency


Administrator can access liquidity post insolvency of the issuer by taking out loans

Legal framework weaknesses New law will apply only to covered bond issues from August 2010 onwards.

The old covered bonds will still be governed by the old covered bond law. Issuers will have two separate cover pools and two separate covered bond curves

No transparency requirements by law

Mortgage Bank


Cover assets

Finnish Covered Bonds

Issue Investor

Over-collaterali-

sation

Assets incl. shares in Mortgage Bank

Liabilities

Bank

Investor

Bank


Other assets

Issue

Cover assets

Over-collaterali-

sation Finnish Covered Bonds

Substitute assets

Security


Security

Credit Focus

22 February 2011 11


Product Finnish Covered BondsStructureWhat is the legal basis? Special lawWho is the issuer? Special as well as universal credit institution with a special licenceWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Commercial mortgages max. 10%)Loans to housing associations without mortgage

Geographical scope Mortgage assets: EEA Public Sector assets: EEA, outside EEA (if step 1 rating, max 20% if step 2 rating)

Mixed pools possible? YesLimit on substitute assets 20% (the Finnish FSA can allow this to be increased in individual

cases)ValuationMaximum LTVs Commercial: 60%, Residential: 70%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? Yes (100%)If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


Yes

ALM guidelinesMinimum OC 2%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assets+ liquidity

facilitiesSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly or via a

special administratorIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?

Preferential claim by law, specific cover pool administration

Is there a separate cover pool administrator in addition to the insolvency administrator?

Yes



Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -


Credit Focus

22 February 2011 12

France – Obligations Foncières (OF) and Obligations à l’Habitat (OH) Issuance structure and overview

Issuance structure Obligations Foncières Obligations à l’Habitat


Legal basis Articles L.515-13 et seq. of the French Monetary and Financial Code

Legal framework strengths Transfer of assets has already taken place pre insolvency

The value of guaranteed home loans and RMBS in the pool is adjusted downward by 50% if the rating of the tranche / the guarantor falls below AA-/Aa3 and to 0% if the rating falls below A-/A3



After an insolvency of the mother company, the SCF can sell assets, take out loans, issue bonds and has access to the central bank to generate liquidity

Issuers have to hold cash covering coupon and principal payments occurring within the next 180 days

For OHs, covered bond investors have a residual senior unsecured claim against the sponsor/parent bank should the cover assets not be sufficient to pay back covered bond investors in full (this is based on the loan from the SFH to the sponsor/parent bank)

Legal framework weaknesses Slightly wider eligible cover asset definition than the CRD (external RMBS

are cover pool eligible as well as guaranteed home loans)

For OHs, there is no limit on home loans guaranteed by internal guarantors (for OF, there is a limit of 35% on guaranteed home loans, no internal guarantors are eligible)

For OFs, little value of the residual senior unsecured claim to the issuer (SCF) as there are practically no other assets outside the cover pool and no recourse to the mother company exists

Substitute assets

Société de Financement à l’Habitat (SFH)


Claim on mother company Obligations à Habitat Issue Investor

Assets incl. shares in SFH

Liabilities

Bank

Housing loans Loan from SFH

Security

Pledge

ClaimSociete de credit foncier (SCF)


Cover assets

Obligations Foncieres Issue Investor

Over-collaterali-

sation

Assets incl. shares in SCF

Liabilities

Bank


Security

Credit Focus

22 February 2011 13

Overview of legal framework Product Obligations Foncieres Obligations HabitatsStructureWhat is the legal basis? Special law Special lawWho is the issuer? Specialised credit institution Specialised credit institutionWho owns the cover assets? The issuer directly The issuer directly or with the mother company but

pledged to the issuer making use of the French adaptation of the European Collateral Directive

Cover AssetsEligible cover assets Exposures to public sector entities Home loans (including up to 100% guaranteed home

loans)Mortgage loans (commercial / residential, including up to 35% guaranteed home loans)

Promissory notes which represent a claim on housing loans

Group originated Senior MBS Group-originated Senior MBSSenior MBS issued by third parties Senior MBS issued by third parties

Geographical scope EEA, countries with step 1 rating EEA, countries with step 1 ratingMixed pools possible? Yes NoLimit on substitute assets 15% 15%ValuationMaximum LTVs Commercial: 60%, Residential: 80%, Mortgage +

government guarantee: 100%Residential: 80%, Mortgage + government guarantee: 100%

Basis for LTV calculation Mortgage lending value Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible?

No No

If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes Yes


Yes Yes

ALM guidelinesMinimum OC 2% 2%Type of coverage test Nominal NominalIs OC above the minimum protected? Yes YesMitigation of market risk Natural matching + use of derivatives + stress testing Natural matching + use of derivatives + stress testingMitigation of liquidity risk Issuers have to hold 180 days worth of liquidity,

"natural" matching + stress testing + substitute assetsIssuers have to hold 180 days worth of liquidity, "natural" matching + stress testing + substitute assets

Supervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checks Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds?

Safeguarding ongoing management of the cover pool Safeguarding ongoing management of the cover pool

Involved in transfer of cover assets + covered bonds to another credit institution


Is there an independent cover pool monitor? Yes YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?




Yes Yes


Cash flows from the pool, sale of cover assets, issuance of bonds / loans, repo with the ECB

Cash flows from the pool, sale of cover assets, issuance of bonds / loans, repo with the ECB

Recourse to the credit institution's insolvency estate?

Yes, senior to senior unsecured creditors of the SCF Yes, senior to senior unsecured creditors of the SFH, pari passu to the senior unsecured creditors of the mother company

Do derivatives survive the insolvency of the issuer?

Yes Yes

How do derivatives counterparties rank vs. covered bond holders?

Pari passu with covered bond holders Pari passu with covered bond holders

Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law?

Yes, on a quarterly basis Yes, on a quarterly basis

UCITS 22(4) Yes YesCRD Yes PossibleRisk weight in the RSA 10% 10% possibleCovered bond association - - Source: ECBC, Crédit Agricole CIB

Credit Focus

22 February 2011 14

France – Caisse de Refinancement de l’Habitat Issuance structure and overview

Issuance structure CRH bonds

Participating bank 1


Equity + sub liabilities Money market assets

Other assets

Caisse de Refinancement de l’Habitat (CRH)


Legal basis Article 13 of act 1985-695

Articles L. 313-42 to L. 313-49 of the French Monetary and Financial Code

Legal framework strengths With 25% very high legal minimum over-collateralisation

Only home loans eligible as collateral

On the level of CRH perfect pass-through between covered bonds issued and Billets de Mobilisation (only some matching requirements between issued covered bonds and the underlying mortgages though)

Participating banks have the obligation to supply additional capital should losses occur at the CRH level

Legal framework weaknesses Only annual disclosure required by law

In the event a participating bank defaults, and the pledged home loan portfolio is transferred to CRH, this might lead to unhedged ALM mismatches (remaining participating banks have to provide liquidity and capital to support the ongoing operations of CRH)

CRH covered bonds

Participating bank X


Other assets

Billet de Mobilisation (BDM)

Cover assets Billet de Mobi-

lisation (BDM)

Pled

ge Issue

Issue

Investor

Collateral

Cover assets

…Billet de Mobi-lisation (BDM)

Billet de Mobilisation (BDM)

Credit Focus

22 February 2011 15


Product CRHStructureWhat is the legal basis? Special lawWho is the issuer? Specialised credit institutionWho owns the cover assets? The issuer directly (the assets are Billets de Mobilisation, the underlying mortgages remain

with the participating banks but are pledged to the issuer)Cover AssetsEligible cover assets Home loans (residential mortgages, including up to 35% guaranteed home loans)Geographical scope EEAMixed pools possible? NoLimit on substitute assets 0%ValuationMaximum LTVs Residential: 80%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible?

No


Yes


Yes

ALM guidelinesMinimum OC 25%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + stress testingMitigation of liquidity risk "Natural" matching + stress testing, liquidity facilitiesSupervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds?

No

Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?

Preferential claim by law


No but CRH does not have any other material liabilities than covered bonds (OC has to be financed by the participating banks on their level)

How can liquidity be generated post insolvency (of one participating bank)?

Cash flows from the pool, sale of cover assets, liquidity and capital injections from the other participating banks

Recourse to the credit institution's insolvency estate?

Yes, pari passu to senior unsecured creditors of the participating banks

Do derivatives survive the insolvency of the issuer?

There are no derivatives on the level of CRH

How do derivatives counterparties rank vs. covered bond holders?

n/a


Yes, on an annual basis

UCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -


Credit Focus

22 February 2011 16

Germany – Pfandbriefe Issuance structure and overview

Issuance structure Pfandbriefe Source: ECBC, Crédit Agricole CIB

Investor

Substitute assets

Bank


Other assets


Hypotheken-pfandbriefe

Issue

Security

Over-collaterali-

sation


collaterali-sation

OeffentlichePfandbriefe

Substitute assets

IssueSecurity

Legal basis Pfandbriefgesetz (2005) – last amended in March 2009

Legal framework strengths Conservative valuation of mortgage assets through the use of the mortgage

lending value and 60% LTMV limits

Detailed rules regarding the segregation of cover assets post insolvency

Over-collateralisation has to be met after stress tests for market-related risk factors

Issuers have to hold cash covering coupon and principal payments occurring within the next 180 days

Strong involvement of the supervisory authority both pre and also post insolvency


Transparency regulations prescribe quarterly statements

Legal framework weaknesses Covered bond investors have a claim on only the first 60% of the LTMV

Broad set of eligible cover assets allowed by law including airplane and ship mortgages (however, they are kept separate from the mortgage and public sector cover pools and do not form part of the collateral backing Hypothekenpfandbriefe or Oeffentliche Pfandbriefe)

Credit Focus

22 February 2011 17


Product PfandbriefeStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution with a special licenseWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Residential and commercial)Ship loansAircraft loans

Geographical scope EEA, CH, USA, Canada, Japan, Multilateral development banksMixed pools possible? NoLimit on substitute assets 10%ValuationMaximum LTVs Residential, Commercial, Agricultural, Ships, Aircraft: 60%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


No

ALM guidelinesMinimum OC 2%Type of coverage test NPV + stress testIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk Issuers have to hold 180 days worth of liquidity, “natural” matching +

stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool



Yes

How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assets, issuance of bonds / loans

Recourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holders

Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? Yes (quarterly)UCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.vdp.de


Credit Focus

22 February 2011 18

Ireland – Asset Covered Securities Issuance structure and overview

Issuance structure ACS


Legal basis Asset Covered Securities Bill, 2001

Asset Covered Securities (Amendment) Act 2007




After an insolvency of the mother company, the ACS bank can sell assets, take out loans and has central bank access to generate liquidity

Legal framework weaknesses Transparency required only annually in the annual accounts of the ACS bank

Little value of the residual senior unsecured claim to the issuer (ACS bank) as there are only limited volumes of other assets outside the cover pool and there is no recourse to the mother company

ACS Bank


Cover assets ACSIssue Investor

Over-collaterali-

sation

Assets incl. shares in ACS bank

Liabilities

Bank


Other assets

Security

Credit Focus

22 February 2011 19

Overview of legal framework Product Mortgage Asset Covered Securities Commercial Mortgage Asset Covered

SecuritiesStructureWhat is the legal basis? Special law Special lawWho is the issuer? Specialized credit institution Specialized credit institutionWho owns the cover assets? The issuer directly The issuer directlyCover AssetsEligible cover assets Residential mortgage loans Commercial mortgage loans

Max 10% commercial mortgage loans Internal +external senior MBSInternal + external senior MBS

Geographical scope EEA, Australia, Canada, Japan, New Zealand, Switzerland, USA

EEA, Australia, Canada, Japan, New Zealand, Switzerland, USA

Mixed pools possible? No NoLimit on substitute assets 15% 15%Valuation

Maximum LTVs Commercial: 60%, Residential: 75% 60%Basis for LTV calculation Market value Market valueIs there a LTV cap which makes the entire loan pool ineligible?

No No


Yes Yes


Yes Yes

ALM guidelinesMinimum OC 3% 10%Type of coverage test Nominal NominalIs OC above the minimum protected? Yes YesMitigation of market risk Natural matching + stress testing + use of

derivativesNatural matching + stress testing + use of derivatives

Mitigation of liquidity risk "Natural" matching + stress testing + substitute assets

"Natural" matching + stress testing + substitute assets

Supervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond

specific checksGranting licences + regular covered bond specific checks

Special role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directlyInvolvement in transfer of cover assets + covered bonds to another credit institution

Safeguarding ongoing management of the cover pool directlyInvolvement in transfer of cover assets + covered bonds to another credit institution

Is there an independent cover pool monitor? Yes YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?




Yes Yes


Cash flows from the pool, sale of cover assets, liquidity facility, mortgage backed promissory notes, central bank access

Cash flows from the pool, sale of cover assets, liquidity facility

Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditors Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? Yes YesHow do derivatives counterparties rank vs. covered bond holders?

Pari passu with covered bond holders Pari passu with covered bond holders


Yes Yes

UCITS 22(4) Yes YesCRD Yes YesRisk weight in the RSA 10% 10%Covered bond association - - Source: ECBC, Crédit Agricole CIB

Credit Focus

22 February 2011 20


Product Public Sector Asset Covered Securities

StructureWhat is the legal basis? Special lawWho is the issuer? Specialized credit institutionWho owns the cover assets? The issuer directlyCover Assets

Eligible cover assets Exposures to public sector entitiesGeographical scope EEA, Australia, Canada, Japan, New Zealand, Switzerland, USA,

multilateral development banksMixed pools possible? NoLimit on substitute assets 15%ValuationMaximum LTVs -Basis for LTV calculation -Is there a LTV cap which makes the entire loan pool ineligible? -Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?

-

ALM guidelinesMinimum OC 3%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + stress testing + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly

Involvement in transfer of cover assets + covered bonds to another credit institution


Yes

How can liquidity be generated post insolvency (of the mother company)? Cash flows from the pool, sale of cover assets, liquidity facility, central bank access

Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? YesUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -


Credit Focus

22 February 2011 21

Luxembourg – Lettres de Gage Issuance structure and overview

Issuance structure Lettres de Gage Source: ECBC, Crédit Agricole CIB

Assets incl. shares in specialised bank

Liabilities

Bank


Investor

Substitute assets

Lettres de Gage Issuer


Other assets


Lettres de Gage Hypothécaire

Issue

Security

Over-collaterali-

sation


collaterali-sation

Lettres de Gage Publique

Substitute assets

IssueSecurity

Legal basis Articles 12-1 to 12-9 of the Financial Sector Act (1993, amended in 2000 and

2008)

CSSF circular 01/42

CSSF circular 03/95




Legal framework weaknesses Very broad eligible asset definition

Investors only have access to the first 60% / 80% of commercial / residential mortgage loans


Credit Focus

22 February 2011 22


Product Lettres de GagesStructureWhat is the legal basis? Special lawWho is the issuer? Specialised credit institutionWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Residential + Commercial)Group originated Senior MBSSenior MBS issued by third partiesShip loansAircraft loansOther moveable asset loans

Geographical scope EEA, CH, USA, Canada, Japan, Multilateral development banks, OECD, NZ, AUS

Mixed pools possible? NoLimit on substitute assets 20%ValuationMaximum LTVs Commercial, Agricultural, Ships, Aircraft, Other moveable assets: 60%,

Residential: 80%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible? No


Yes


No

ALM guidelinesMinimum OC 2%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool


Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?



Yes

How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders?

Pari passu with covered bond holders

Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? No

UCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -


Credit Focus

22 February 2011 23

Italy – Obbligazioni Bancarie Garantite Issuance structure and overview

Issuance structure Obbligazioni Bancarie Garantite

Bank


Other assets

Cover assets


Legal basis Law 80/2005

Law 130 on securitisations


Banks have to fulfil additional capital requirements to be able to issue covered bonds (no issuance limit on covered bonds only if total capital ratio is above 11% and the tier 1 ratio above 7%)

Involvement of the Bank of Italy both pre and also post insolvency

Legal framework weaknesses No prescribed over-collateralisation by law, collateralisation required on an

NPV basis though

Broad set of eligible assets is allowed by law

No separate cover pool administrator post insolvency of the issuer

Administrator has to rely on cash flows from the pool and proceeds from selling pool assets to access liquidity post insolvency


OBG Issue

Over-collaterali-

sation

Guarantee

Cover assets

Investor

Sale and transfer

Liabilities

SPV

Credit Focus

22 February 2011 24


Product Obbligazioni Bancarie GarantiteStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institutionWho owns the cover assets? SPE which guarantees the covered bondsCover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Commercial, residential)Group originated Senior MBSSenior MBS issued by third parties

Geographical scope EEA, SwitzerlandMixed pools possible? YesLimit on substitute assets 15%Valuation

Maximum LTVs Commercial: 60%, Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


Yes

ALM guidelinesMinimum OC 0%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk Natural matching + use of derivativesSupervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool


Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool

administrationIs there a separate cover pool administrator in addition to the insolvency administrator?

No

How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.abi.it


Credit Focus

22 February 2011 25

Netherlands – Dutch Registered Covered Bonds Issuance structure and overview

Issuance structure Dutch Registered Covered Bonds

Bank


Other assets

Cover assets


Legal basis Regulation on Amending the Regulation Implementing the Financial

Supervision Act

Decree of 3 June 2008 Regarding Covered Bonds


Strong involvement of the Dutch Central Bank pre insolvency

Legal framework weaknesses No prescribed over-collateralisation by law

Broad set of eligible assets are allowed by law (CRD and non-CRD-compliant assets)

Administrator has to rely on cash flows from the pool and proceeds from selling pool assets to access liquidity post insolvency


Dutch Covered Bonds Issue

Over-collaterali-

sation

Guarantee

Cover assets

Investor

Liabilities

SPV

Sale and transfer

Credit Focus

22 February 2011 26


Product Dutch regulated covered bondsStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institutionWho owns the cover assets? SPE which guarantees the covered bondsCover AssetsEligible cover assets Subject to DNB approvalGeographical scope EEA, US, Canada, Japan, the Republic of Korea, Hong

Kong, Singapore, Australia, New Zealand, SwitzerlandMixed pools possible? YesLimit on substitute assets n.a.Valuation

Maximum LTVs -Basis for LTV calculation -Is there a LTV cap which makes the entire loan pool ineligible? -If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


Yes

ALM guidelinesMinimum OC 0%Type of coverage test NominalIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk Natural matching + use of derivativesSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? NoIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?

Yes

How can liquidity be generated post insolvency (of the mother company)? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD PossibleRisk weight in the RSA 10% or 20% (depends on LTV limit)Covered bond association -


Credit Focus

22 February 2011 27

Comparison of Dutch covered bond programmes

ABN Amro Achmea ING Bank NIBC Bank SNS BankCovered Bond Ratings AAA / Aaa / AAA - / Aa2 / AAA AAA / Aaa / AAA - / Aa2 / AAA - / Aaa / AAAProgram volume in EUR bn 25 10 30 7 15Eligible assets Mortgages up to

EUR1.5mnMortgages up to EUR1.5mn

Mortgages up to EUR1.0mn



Geographical scope EEA, US, Canada, Japan, the Republic of Korea, Hong Kong, Singapore, Australia, New Zealand, Switzerland

Dutch and non-Dutch

EEA, US, Canada, Japan, the Republic of Korea, Hong Kong, Singapore, Australia, New Zealand, Switzerland



LTV cap in ACT 80% 125% 80% 80% 80%Maximum asset percentage 92,5% 90,5% 97,0% 79,8% 72,5%Minimum over-collateralisation 8,1% 10,5% 3,1% 25,3% 37,9%House price indexation 100% of price

declines, 85% of price increases

100% of price declines, 85% of price increases




In arrears accounting for the ACT No recognition 30% of current balance

30% of current balance

No recognition 30% of current balance

Maturity structure Hard bullet + pre maturity test (soft bullets possible going forward)

Soft bullet with 12 months extension

Hard bullet + pre maturity test (soft bullets possible going forward)



In covered bond register Yes No Yes Yes YesUCITS Yes No Yes Yes YesRisk weight 10% 20% 10% 10% 10%

Source: Individual issuers, Crédit Agricole CIB

Credit Focus

22 February 2011 28

Norway – Obligasjoner met fortrinnsrett Issuance structure and overview

Issuance structure Obligasjoner met fortrinnsrett Source: ECBC, Crédit Agricole CIB

Bank Boligkreditt

Equity + Other liabilities

Cover assets

Norwegian Covered Bonds

Issue Investor

Over-collaterali-

sation

Assets incl. shares in Boligkreditt

Liabilities

Bank


Legal basis Law on the Financing Business (2002)

Secondary legislation (2007)


Strict stress tests for market- and liquidity-related risks


Administrator can access liquidity post insolvency of the sponsor bank by taking out loans or even issuing new covered bonds

Legal framework weaknesses Broad set of eligible assets + mixed pools are allowed by law

No prescribed over-collateralisation by law

No specific involvement of the supervisory authorities in crisis


Credit Focus

22 February 2011 29


Product Obligasjoner met fortrinnsrettStructureWhat is the legal basis? Special lawWho is the issuer? Specialised credit institutionWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Residential + commercial)Group originated Senior MBSOther registered assets (ships, aircraft, other moveable assets)

Geographical scope Mortgage assets: domestic Public Sector assets: EEA, OECD

Mixed pools possible? YesLimit on substitute assets 20%ValuationMaximum LTVs Commercial: 60%, Residential: 75%, other (agricultural, ship,

aircraft): 60%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


Yes

ALM guidelinesMinimum OC 0%Type of coverage test NPV + stress testsIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk "Natural" matching + stress testing + substitute assets, liquidity

facilitiesSupervision and monitoringWhat is the role of the supervisor? Granting licencesSpecial role of supervisor in crisis regarding covered bonds? NoIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?

Yes


Cash flows from the pool, sale of cover assets, issuance of bonds / loans

Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -


Credit Focus

22 February 2011 30

Portugal – Obrigações Hipotecárias (OH) and Obrigações Sobre o Sector Público (OSP) Issuance structure and overview

Issuance structure Portuguese Covered Bonds Source: ECBC, Crédit Agricole CIB

Investor

Substitute assets

Bank


Other assets


ObrigaçõesHipotecárias

Issue

Security

Over-collaterali-

sation


collaterali-sation

Obrigações Sobre o Sector Público

Substitute assets

IssueSecurity

Legal basis Decreto-Lei n.º 59/2006, Primary Legislation

Portuguese Secondary Legislation - Notice number 5/2006

Legal framework strengths Separate administrator for the cover pool / covered bonds post insolvency

Administrator can access liquidity post insolvency

Strong involvement of the Bank of Portugal both pre and also post insolvency

OC levels must be maintained even after stress tests

Legal framework weaknesses Covered bond holders have no claim on the part of the loan above the LTV

limits

If a loan exceeds the LTV limit due to house price declines, it has to be taken out of the cover pool, putting pressure on OC limits if it cannot be substituted by an eligible loan

No transparency requirement by law

Counterparties of liquidity facilities rank subordinate to covered bond investors and derivative counterparties making it more difficult/costly for issuers to find counterparties for this purpose

Credit Focus

22 February 2011 31


Product Obrigações Hipotecárias (OH) + Obrigações Sobre o Sector Público (OSP)

StructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution or specialised credit institutionWho owns the cover assets? The issuer directly

Cover Assets

Eligible cover assets Exposures to public sector entities (OSP)Mortgage loans (Commercial + residential for OH)

Geographical scope Mortgage assets: EEA Public Sector assets: EEA

Mixed pools possible? NoLimit on substitute assets 20%Valuation

Maximum LTVs Commercial: 60%, Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? Yes (Commercial: 60%, Residential: 80%)If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

No, loans have to be removed if limits are breached.


No

ALM guidelinesMinimum OC 5.26% for OH, 0% for OSPType of coverage test NPV + stress testIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assets +

liquidity facilitiesSupervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Involved in transfer of cover assets + covered bonds to

another credit institutionIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool Is there a separate cover pool administrator in addition to the insolvency administrator?

Yes

How can liquidity be generated post insolvency (of the mother company)? Cash flows from the pool, sale of cover assets, take out loans

Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association GOH Portugal


Credit Focus

22 February 2011 32

Spain – Cedulas Hipotecarias + Territoriales

Issuance structure

Issuance structure Cedulas Hipotecarias Issuance structure Multi Cedulas Hipotecarias


Legal basis Law 2/1981 – on the regulation of the mortgage market, which was updated

by Law 41/2007

Royal Decree 716/2009 – develops certain aspects of Law 2/1981

Law 22/2003 – insolvency law

Law 3/2009 – establishes that mortgage market law supersedes the insolvency law

Legal framework strengths High over-collateralisation levels required by law

Derivatives counterparties are subordinate to covered bond holders (however, this makes it more difficult to find counterparties)

Insolvency administrator has the ability to take out loans and issue new bonds post insolvency of the issuer to generate liquidity

Legal framework weaknesses Weak ALM guidelines (ie, no regulations regarding interest rate and currency

risk hedging)

In case of insolvency of the issuer, there is no separate administrator for the cover pool and the covered bonds

It is unlikely that the administrator will have access to ECB funding after the insolvency of the issuer

Transparency requirements prescribe only annual disclosure

CedulasHipotecarias X

CedulasHipotecarias 1

Liquidity line / reserve fund

Multi CedulasHipotecarias

Bank 1

Equity + other

liabilities

Other assets

Cover assetsCedulas

Hipotecarias

Issue Investor

Bank X

Other assets

Cover assetsSubstitute assets

Bank


Other assets

Qualifying mortgages Cedulas Hipotecarias

Issue

Investor

Over-collaterali-

sation

Non-qualifying mortgages

Security

Equity + other

liabilities

CedulasHipotecarias

…

Fond de Titulización

Other assets

Issue

Credit Focus

22 February 2011 33


Product Cedulas Hipotecarias Cedulas TerritorialesStructureWhat is the legal basis? Special law Special lawWho is the issuer? Universal credit institution Universal credit institutionWho owns the cover assets? The issuer directly The issuer directlyCover AssetsEligible cover assets Mortgage loans Exposures to public sector

entitiesGeographical scope EU EEALimit on substitute assets 5% 0%Mixed pools possible? No NoValuationMaximum LTVs Commercial: 60%, Residential: 80% not relevantBasis for LTV calculation Mortgage lending value not relevantIs there a LTV cap which makes the entire loan pool ineligible?

No not relevant


Yes, but it the whole loans will not be considered eligible anymore for the purpose of calculating the legal OC

not relevant


Yes not relevant

ALM guidelinesMinimum OC 25% 43%Type of coverage test Nominal NominalIs OC above the minimum protected? Yes YesMitigation of market risk Use of derivatives Not specified in lawMitigation of liquidity risk "Natural" matching + substitute assets Not specified in lawSupervision and monitoringWhat is the role of the supervisor? Covered bond specific checks Covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds?

No No

Is there an independent cover pool monitor? Yes NoSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?

Preferential claim by law Preferential claim by law


No No

How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assets, issuance of bonds / loans

Cash flows from the pool, sale of cover assets

Recourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditors

Yes, pari passu with senior unsecured creditors

Do derivatives survive the insolvency of the issuer? Yes Not specified in lawHow do derivatives counterparties rank vs. covered bond holders?

Subordinated to covered bond holders Not specified in law


Yes No

UCITS 22(4) Yes YesCRD Yes YesRisk weight in the RSA 10% 10%Covered bond association - ‐


Credit Focus

22 February 2011 34

Sweden – Säkerställda Obligationer Issuance structure and overview

Issuance structure Swedish Covered Bonds


Investor

Bank


Other assetsOver-

collaterali-sation

Legal basis The Swedish Covered Bond (Issuance) Act 2003:1223

Regulations and general guidelines governing covered bonds, Finansinspek-tionen, 2004

Government Bill – Liquidity matching for covered bonds 2009/10:1032

Legal framework strengths Separate administrator for the cover pool / covered bonds post insolvency

Administrator can access liquidity post insolvency

Involvement of the FSA both pre and also post insolvency

Commercial mortgages limited to 10% of the pool volume

New mortgages cannot be granted in Sweden if their LTV would exceed 85%

Legal framework weaknesses No over-collateralisation required by law, collateralisation has to withstand

stress tests though

Mixed pools possible

No transparency requirement by law

Issue

Cover assets

Swedish Covered Bonds

Substitute assets

Security

Credit Focus

22 February 2011 35


Product Säkerställda ObligationerStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution with a special licenseWho owns the cover assets? The issuer directly

Cover AssetsEligible cover assets Exposures to public sector entities

Mortgage loans (Commercial mortgages max. 10%)Geographical scope Mortgage assets: domestic, EEA

Public Sector assets: domestic, EEA, OECDMixed pools possible? YesLimit on substitute assets 20% (the Swedish FSA can allow this to be increased to 30%

for a limited period)Valuation

Maximum LTVs Commercial: 60%, Residential: 75%, agricultural: 70%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


Yes

ALM guidelinesMinimum OC 0%Type of coverage test NPV + stress testsIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly

or via a special administratorIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?

Yes



Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.ascb.se


Credit Focus

22 February 2011 36

United Kingdom – Regulated UK Covered Bonds Issuance structure and overview

Issuance structure UK Covered Bonds

Bank


Other assets

Cover assets


Legal basis Regulated Covered Bond Regulations 2008

Regulated Covered Bonds Specialist Sourcebook 2008


Strong involvement of the FSA both pre and also post insolvency


Currently no transparency requirement by law (although the FSA will impose strict rules going forward, which will provide the best transparency in the market)

Legal framework weaknesses The SPV can rely only on the cash flows generated by the pool and the

ability to sell assets to make coupon and redemption payments

No detailed rules regarding market and liquidity risk in the law

No over-collateralisation required by law

Broad set of eligible cover assets allowed by law

UK Covered Bonds Issue

Over-collaterali-

sation

Guarantee

Cover assets

Investor

Sale through equitable assignment

Liabilities

SPV

Credit Focus

22 February 2011 37


Product UK Regulated Covered BondsStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institutionWho owns the cover assets? SPE which guarantees the covered bondsCover AssetsEligible cover assets Mortgage loans (Commercial + residential)

Exposures to public sector entities and PPI/PFIsMortgage loans and loans to housing associations without a mortgageGroup originated Senior MBSShip loans

Geographical scope EEA, CH, USA, Canada, Japan, NZ, AUSMixed pools possible? YesLimit on substitute assets Not specified in lawValuationMaximum LTVs Commercial: 60%, Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?

Yes


Yes

ALM guidelinesMinimum OC 0%Type of coverage test NominalIs OC above the minimum protected? YesMitigation of market risk Use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool


Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law to the assets held by the SPEIs there a separate cover pool administrator in addition to the insolvency administrator?

Yes

How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.ukrcbc.com


Credit Focus

22 February 2011 38

Comparison of UK regulated covered bond programmes

Abbey National

Barclays Bank Bank of Scotland

HSBC Lloyds TSB Bank

Nationwide BS

Royal Bank of Scotland

Yorkshire BS

Covered Bond Rating

AAA / Aaa / AAA

- / Aaa / AAA AAA / Aaa / AAA

AAA / Aaa / - - / Aaa / AAA AAA / Aaa / AAA

- / Aaa / AAA - / Aa1 / AAA

Programm volume in EUR bn

25 35 60 15 60 35 15 7.5

Eligible assets Residential mortgages up to GBP1.0mn

Residential mortgages up to GBP1.5mn







Geographical focus England, Wales, Northern Ireland, Scotland

England, Wales, Northern Ireland, Scotland

England, Wales, Scotland






LTV cap 75% 75% 60% 75% 75% 75% 75% 75%House price index Halifax Halifax Halifax Halifax Halifax Nationwide Halifax HalifaxMaximum asset percentage

91.0% 94.0% 92,5% 92,5% 92,5% 93.0% 90.0% 93.5%

Minimum over-collateralisation

109.9% 106.4% 108.1% 108.1% 108.1% 107.5% 111.1% 107.0%

Current asset percentage

82.0% 77.3% 78.0% 78.2% 79.9% 84.5% 79.0% 78.0%

Current minimum over-collateralisation

122.0% 129.4% 128.2% 127.9% 125.2% 118.3% 126.6% 128.2%

In arrears accounting

Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.


No recognition Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.

Full recognition if in arrears < 3 months, otherwise 70%




Maturity structure 12 months soft bullet

Hard bullet + pre maturity test



12 months soft bullet




Source: Bloomberg, Individual issuers, Crédit Agricole CIB

Credit Focus

22 February 2011 39

Credit Research contact details Jean-François Paren Global Head of Credit Research / Telecom Analyst +33 1 41 89 33 95 Franck Bataille Utilities Analyst +33 1 41 89 14 86 Gwenaëlle Lereste Financials Analyst +33 1 41 89 06 90 Christophe Boulanger Autos Analyst +49 69 78 901 760 Harpreet Parhar CFA Credit Strategist +44 20 7214 5534 Caroline Brugère Industrials Analyst +33 1 41 89 88 38 Claire Poncet Dumont Retail Analyst +33 1 41 89 94 76 Axel de Chaurand Strategy Data Manager +33 1 41 89 04 65 Eric Sharper Industrials Analyst +44 20 7214 6546 Florian Eichert CFA Covered Bond Analyst +44 20 7214 6402 Guillaume Thomas Quantitative Analyst +33 1 57 87 02 80 Elisabeth Van Sante Financials Analyst +44 20 7214 6538

Certification The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Florian Eichert Disclosures Company Disclosure Bank of Scotland None

A NOT IN USE B NOT IN USE C The Company owned more than 5% of the total issued share capital of Crédit Agricole SA as of the end of the

second most recent month preceding the publication date of this report. D NOT IN USE E One or more companies in the Crédit Agricole S.A. group owned more than 3 % of the total issued share

capital of the Company as of the end of the second most recent trading day preceding the publication date of this report.

F Crédit Agricole Cheuvreux and/or a company in the Crédit Agricole S.A. group is a market maker or a liquidity provider for the financial instruments of the Company.

G Crédit Agricole Corporate and Investment Bank (CIB) and/or a company of the Crédit Agricole S.A. group has been lead or co-lead manager over the previous 12 months in a publicly disclosed offer of or on financial instruments of the Company.

H Crédit Agricole CIB and/or a company in the Crédit Agricole S.A. group has concluded or is party to a non confidential agreement relating to the provision of investment banking services (except publicly disclosed offers mentioned under G) to the Company during the past 12 months or that has given rise during the same period to the payment of compensation or to the promise to get a compensation paid.

I This research has been communicated to the Company and following this communication, its conclusion has been amended before its dissemination.

J An executive director of the Credit Agricole S.A. group is a director or board member of the company. Performance of credit instruments: We express our expectation of how the 5Y CDS is going to perform vis-à-vis its sector. The timeframe of that recommendation is one month. When the analyst changes a recommendation he/she should indicate in the analysis when the last recommendation was made. Outperform: CDS spreads should outperform the sector performance. Sectorperform: CDS spreads should perform in line with the sector performance. Underperform: CDS spreads should underperform the sector performance.

Recommendation System: Fundamental credit assessment: We evaluate the fundamental credit quality trend of an issuer for the next 12 months. Crédit Agricole CIB’s Credit Research evaluates the potential changes of an issuer for the next 12 months and assigns a one year forward rating based on S&P’s scale. This rating is to be compared with the average long-term rating assigned by S&P and Moody’s. Internal credit rating: We assign a rating to a company which reflects the assessment of the credit quality by the credit analyst. The timeframe for the rating is one year. As a rating scale we use a scale similar to the one of S&P and Fitch, however, we substitute the rating agencies plus or minus by high and low, ie. the Crédit Agricole CIB scale uses AAA, High-AA, Mid-AA, Low-AA, High-A, Mid-A etc.

Credit products rating distribution table: (as at 19 January 2011)

All covered companies Companies where Crédit Agricole CIB provided Investment Banking Services in past 12 months

Count Percent Count Percent Outperform 15 15% 5 33% Sectorperform 61 61% 23 38% Underperform 24 24% 5 21%

Disclaimer © 2011, CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK All rights reserved. This research report or summary has been prepared by Crédit Agricole Corporate and Investment Bank or one of its affiliates (collectively “Crédit Agricole CIB”) from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is a “commercial communication” as defined in article 6 of the Directive 2000/31/CE of 8 June 2000. For the avoidance of doubt, it is not a “communication à caractère promotionnel” within the meaning of the Règlement General AMF. It is provided for information purposes only. Nothing in this report should be considered to constitute investment, legal, accounting or taxation advice and you are advised to contact independent advisors in order to evaluate this report. It is not intended, and should not be considered, as an offer, invitation, solicitation or personal recommendation to buy, subscribe for or sell any of the financial instruments described herein, nor is it intended to form the basis for any credit, advice, personal recommendation or other evaluation with respect to such financial instruments and is intended for use only by those professional investors to whom it is made available by Crédit Agricole CIB. Crédit Agricole CIB does not act in a fiduciary capacity to you in respect of this report. Crédit Agricole CIB may at any time stop producing or updating this report. Not all strategies are appropriate at all times. Past performance is not necessarily a guide to future performance. The price, value of and income from any of the financial instruments mentioned in this report can fall as well as rise and you may make losses if you invest in them. Independent advice should be sought. In any case, investors are invited to make their own independent decision as to whether a financial instrument or whether investment in the financial instruments described herein is proper, suitable or appropriate based on their own judgement and upon the advice of any relevant advisors they have consulted. Crédit Agricole CIB has not taken any steps to ensure that any financial instruments referred to in this report are suitable for any investor. Crédit Agricole CIB will not treat recipients of this report as its customers by virtue of their receiving this report. Crédit Agricole CIB, its directors, officers and employees may effect transactions (whether long or short) in the financial instruments described herein for their own accounts or for the account of others, may have positions relating to other financial instruments of the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. Crédit Agricole CIB may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Crédit Agricole CIB is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. Crédit Agricole CIB has established a “Policy for Managing Conflicts of Interest in relation to Investment Research” which is available upon request. A summary of this Policy is published on the Crédit Agricole CIB website: http://www.ca-cib.com/group-overview/the-markets-in-financial-instruments-directive-mifid.htm. This Policy applies to its investment research activity. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without the prior express written permission of Crédit Agricole CIB. To the extent permitted by applicable securities laws and regulations, Crédit Agricole CIB accepts no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents. France: Crédit Agricole Corporate and Investment Bank is authorised by the Autorité de Contrôle Prudentiel (“ACP”) and supervised by the ACP and the Autorité des Marchés Financiers (“AMF”). United Kingdom: Approved and/or distributed by Crédit Agricole Corporate and Investment Bank, London branch. Crédit Agricole Corporate and Investment Bank is authorised by the ACP and supervised by the ACP and the AMF in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. United States of America: This research report is distributed solely to persons who qualify as “Major U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934 and who deal with Crédit Agricole Corporate and Investment Bank. Recipients of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Crédit Agricole Securities (USA), Inc. (a broker-dealer registered with the Securities and Exchange Commission). The delivery of this research report to any person in the United States shall not be deemed a recommendation of Crédit Agricole Securities (USA), Inc. to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. Italy: This research report can only be distributed to, and circulated among, professional investors (operatori qualificati), as defined by the relevant Italian securities legislation. Spain: Distributed by Crédit Agricole Corporate and Investment Bank, Madrid branch and may only be distributed to institutional investors (as defined in article 7.1 of Royal Decree 291/1992 on Issues and Public Offers of Securities) and cannot be distributed to other investors that do not fall within the category of institutional investors. Hong Kong: Distributed by Crédit Agricole Corporate and Investment Bank, Hong Kong branch. This research report can only be distributed to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571) and any rule made there under. Japan: Distributed by Crédit Agricole Securities Asia B.V. which is registered for securities business in Japan pursuant to the Law Concerning Foreign Securities Firms (Law n°5 of 1971, as amended), and is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. This report is not intended, and should not be considered, as advice on investments in securities which is subject to the Securities Investment Advisory Business Law (Law n°74 of 1986, as amended). Luxembourg: Distributed by Crédit Agricole Corporate and Investment Bank, Luxembourg branch. It is only intended for circulation and/or distribution to institutional investors and investments mentioned in this report will not be available to the public but only to institutional investors. Singapore: Distributed by Crédit Agricole Corporate and Investment Bank, Singapore branch. It is not intended for distribution to any persons other than accredited investors, as defined in the Securities and Futures Act (Chapter 289 of Singapore), and persons whose business involves the acquisition or disposal of, or the holding of capital markets products (as defined in the Securities and Futures Act (Chapter 289 of Singapore)). Switzerland: Distributed by Crédit Agricole (Suisse) S.A. This report is not subject to the SBA Directive of January 24, 2003 as they are produced by a non-Swiss entity. Germany: Distributed by Crédit Agricole Corporate and Investment Bank, Frankfurt branch and may only be distributed to institutional investors. Australia: Distributed to wholesale investors only. This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act. THE DISTRIBUTION OF THIS DOCUMENT IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS DOCUMENT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. BY ACCEPTING THIS REPORT YOU AGREE TO BE BOUND BY THE FOREGOING.

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20110222 Credit Agricole Covered Bonds

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