OREANDA-NEWS. Fitch Ratings, Frankfurt/London, 29 June 2016: Fitch Ratings has affirmed Norddeutsche Landesbank Girozentrale's (NORD/LB; A-/Stable/F1/bb+) outstanding public-sector Pfandbriefe at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS

The rating reflects NORD/LB's Long-Term Issuer Default Rating (IDR) of 'A-', the unchanged Discontinuity Cap (D-Cap) of 5 notches (low risk), an unchanged IDR uplift of 2 notches and the 19% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the 'AAA' breakeven OC of 16.5%. The Stable Outlook mirrors that on the issuer`s Long-Term IDR.

NORD/LB's 'AAA' breakeven OC has increased to 16.5% from 15% previously. The main constituent continues to be the cash-flow valuation component (13.6%), up from 12% previously. The increase is driven by a combination of a higher weighted-average life (WAL) mismatch after the application of prepayment assumptions (1.3 years higher than last year), a more stressful interest-rate scenario and updated FX stresses applied.

Fitch took into account in its cash-flow analysis embedded call options on part of the programme's liabilities, which enhance the ability to manage existing mismatches.

The low credit loss component of 3.7% reflects the large proportion of low-risk German assets in the cover pool. The programme's rating is credit-linked to Germany (AAA/Stable/F1+) as 57% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states. The credit loss component has slightly increased by 50bp since the last analysis one year ago, mainly due to the maturity of assets under statutory guarantee and lower rating assumptions for some municipal exposure, which decreased the weighted-average rating of the cover pool.

In addition, as Fitch did not conduct a detailed analysis of loans to religious organisations constituting less than 0.1% of NORD/LB's Cover Pool, the agency has applied a conservative 'CCC' assumption for these assets. This assumption contributes less than 1bp of the credit loss component.

Compared to last year's analysis, the asset disposal loss component has decreased to 0.9% (2% previously), driven by high prepayments of 5% which has been identified as the worst-case scenario (4% previously). This reduced the volume of forced asset sales for timely payment of outstanding Pfandbriefe.

Fitch applied a variation from its "Counterparty Criteria for Structured Finance and Covered Bonds" published 14 May 2014. No commingling loss was assumed in line with the agency's "Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds", dated 14 April 2016. This is because NORD/LB's Short-Term rating meets the proposed account bank eligibility threshold of 'A' or 'F1' under the exposure draft. This variation is reflected in the asset disposal loss component of the breakeven OC for the rating, which would otherwise have increased. The variation has had no impact on the rating of NORD/LB's public-sector Pfandbriefe. In the event that this aspect is not converted into criteria, the programme will be subject to further review.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to a downgrade if any of the following occurs: (i) the IDR is downgraded to 'BB+' or lower; (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to three notches or lower; (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 16.5%; or (iv) the German sovereign is downgraded to 'AA+' or below.

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 probably be downgraded to 'AA-', reflecting an IDR uplift of two notches and a single-notch recovery uplift.

The Fitch breakeven OC for the covered bond rating 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.