Fitch Places CBK Public Sector Pfandbriefe on RWN; Mortgage Pfandbriefe Unaffected
OREANDA-NEWS. Fitch Ratings has placed Commerzbank AG's (CBK, BBB+/Stable/F2) public sector Pfandbriefe 'AAA' rating on Rating Watch Negative (RWN).
The RWN follows CBK's announcement of the transfer of Hypothekenbank Frankfurt's (HF) outstanding public sector and mortgage Pfandbriefe to CBK as part of the wind up of HF, a wholly owned subsidiary of CBK.
The rating on CBK's mortgage Pfandbriefe programme (AAA/Stable) is unaffected as based on the currently available information, changes in cover pool composition and overcollateralisation (OC) levels are unlikely to lead to changes in the 'AAA' rating.
The RWN on the public sector Pfandbriefe programme will be resolved upon receipt of information on the composition of CBK's combined public sector cover pool, which we expect to receive in August 2016.
KEY RATING DRIVERS
The RWN on the public sector Pfandbriefe reflects Fitch's assumptions about the combined cover pool composition, significant open foreign exchange positions in the combined cover pool, the lower level of current OC in the HF's public sector programme as of 31 March 2016 compared with the CBK public sector programme and CBK's public statement that it targets a 'AA' rating for its public sector Pfandbriefe programme in the future.
As of 31 March 2016, HF's public sector cover assets were EUR12.3bn compared with EUR2.2bn cover assets in CBK's public sector programme. Consequently, Fitch expects the combined pool to mirror the greater international diversification of HF's cover assets, including higher exposure to lower rated countries. Therefore, Fitch expects an increase in credit loss from the inclusion of HF's cover assets.
HF's public sector Pfandbriefe programme shows significant open foreign exchange positions. In its modelling, Fitch expects this to lead to higher breakeven OC levels for a given rating than is currently the case for the CBK programme.
As of 31 March 2016, the reported OC for HF's public sector Pfandbriefe was 6.5% compared with 18.7% for CBK's 'AAA' rated programme. The current breakeven OC to maintain the 'AAA' rating is 16%.
CBK's current 'AAA' public sector Pfandbriefe programme rating is based on CBK's Long-term Issuer Default Rating (IDR) of 'BBB+', two notches IDR uplift, a Discontinuity Cap of 5 notches (low risk), and the 18% OC that Fitch takes into account in its analysis, which provides more protection than the breakeven OC of 16%.
For the mortgage Pfandbriefe programme, Fitch understands that HF's cover assets have been partially transferred to CBK's mortgage cover pool. Fitch believes that the majority of transferred cover assets consist of highly seasoned residential mortgage loans with reported loan to value ratios below that of CBKs cover pool, which is credit positive. The remaining assets (mainly loans secured by multifamily houses) may be classified by Fitch as commercial real estate, which would likely increase the credit loss. There have been no open FX exposures in the CBK programme. As of 31 March 2016, the HF programme showed low open positions compared with the size of the cover pool. The OC for the HF mortgage Pfandbriefe was 25% and was 141% for the CBK mortgage Pfandbriefe. The current breakeven OC for the 'AAA' rating is 10%.
The 'AAA' rating of the public sector Pfandbriefe would be vulnerable to downgrade if any of the following occurs: (i) CBK's IDR is downgraded to 'BB+' or lower; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 4 notches or lower; or (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 16%.
The 'AAA' rating of the mortgage Pfandbriefe would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded to 'BB+' or lower; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 4 notches or lower; or (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 10%. If the OC that Fitch considers in its analysis drops to the legal minimum requirement of 2% on a net present value basis, it would not be sufficient to allow for timely payment of the Pfandbriefe following an issuer default. As a result, the Pfandbrief rating would likely be downgraded to 'A', composed of the adjusted IDR of 'A-' and one notch recovery uplift.
The Fitch breakeven OC for the covered bond ratings will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the covered bond rating cannot be assumed to remain stable over time.