France Seeks to Save Mortgage Bank Without Spending Cash

The French government, which rescued Dexia (DEXB) SA, now faces the challenge of saving real estate lender Credit Immobilier de France without spending taxpayers’ money.

Prime Minister Jean-Marc Ayrault said yesterday on radio station France Inter that a guarantee the state agreed to provide CIF won’t hurt the government’s budget. The state has so far been unsuccessful in finding a buyer for CIF, a Paris-based mortgage bank owned by 56 local cooperative lenders.

“The state has taken its responsibilities in providing a guarantee, but as this bank has its own capital, the money of taxpayers won’t be called upon,” Ayrault, 62, said in the interview on France Inter.

Finance Minister Pierre Moscovici said in a statement on Sept. 1 that the government would provide a guarantee for CIF. The backing is worth 20 billion euros ($26 billion), Les Echos reported today, without saying where it got the information. The rescue follows the state bailout of Franco-Belgian lender Dexia, which needed aid in 2008 and in 2011.

Bonds of CIF, which doesn’t have traded stock, jumped today. The 3.75 percent notes due March 2014 rose 2.85 cents on the euro to 97.9 cents, the most since June, Bloomberg generic prices show. The yield fell 2.09 percentage points to 5.22 percent from 7.31 percent, the prices show.

Stop-Gap Measure

“Bond buyers always like a guarantee,” said John Raymond, an analyst at CreditSights Inc. in London. “The real news was back in May, when it was downgraded and the government started looking for someone to take it over. I assume they’re still looking for a longer-term solution, and this guarantee is a stop-gap.”

Moody’s Investors Service cut the lender’s standalone financial strength rating on May 17 to E/caa1, from C/a3, saying the lender’s business model was “currently unviable.” That came after regulators on May 8 suspended trading in the company’s debt securities, sending prices plunging.

The 3.75 percent notes fell 5.22 cents to 96.04 from 101.26 cents on May 9, Bloomberg generic prices show.

The standalone financial strength rating is a measure that attempts to filter out the effects a government backing.

Moody’s downgraded its long-term debt ratings on CIF on Aug. 28 to Baa1 from A1, saying the bank no longer had access to capital markets, and said it expected French authorities would “orchestrate an orderly resolution.” The rating is nine levels higher than it would be without government support.

The company’s CIF Euromortgage funding unit has a 1.75 billion-euro covered bond maturing on Oct. 11, Bloomberg data show. The bond was little changed at 100.36 cents.

Market Funding

CIF has a market share of about 4 percent in the French housing loan market, according to a January 2012 presentation. The same slideshow claimed a 14.7 percent core Tier 1 capital ratio, a key measure of financial strength, and “efficient funding on wholesale markets.” The bank said in January it had 33 billion euros of real estate loans.

CIF confirmed that it requested a guarantee from the French government, according to a statement on its website. CIF and all its subsidiaries have about 19 billion euros of bonds maturing by the end of 2016, including a peak of 5.3 billion euros in 2014, according to Bloomberg data. CCCIF, one of its two refinancing units, got 3.1 billion euros in European Central Bank 1 percent three-year loans in February, according to its website.

While not a systemic bank, CIF had about 7.5 billion euros of interbank debt at the end of 2011, according to its website.

“The bank’s business model relies on financing that comes almost exclusively from the market,” Moscovici, 54, said in the statement on CIF. “This model, made fragile by the crisis, is put further into doubt by the new norms of Basel III.”

Rules from the Basel Committee on Banking Supervision, known as Basel III, will toughen capital standards for banks starting next year.

La Banque Postale, the banking unit of the French post office, said in June that it was examining CIF. Fitch Ratings said in a statement Aug. 31 that an acquisition of CIF by La Banque Postale would be “broadly neutral” to the financial strength of the postal bank.

To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net; John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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