OREANDA-NEWS. June 09, 2015. Fitch Ratings has affirmed Commerzbank AG's (CBK; BBB/Positive/F2/bbb) public sector Pfandbriefe at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects CBK's Long-term Issuer Default Rating (IDR) of 'BBB', the unchanged Discontinuity Cap (D-Cap) of 5 (low risk), an IDR uplift of 2 and the 18% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the breakeven OC of 16%.

The affirmation is based on Fitch's view that the issuer has sufficient OC to cover a 'AAA' stress scenario, including significant stresses it has applied on a 10% open foreign currency position in the cover pool.

The current cover pool has a 22% open position consisting of Swiss franc (17%) and US dollar (4%) denominated public sector assets. The issuer has committed to replace 11% of the CHF assets with German federal states assets so that the open foreign currency position will not exceed 10%. Fitch still views this level as high and will continue to apply significant foreign currency stresses in determining breakeven OC as foreign currency depreciation may lead to an unpredictable deterioration of OC. The stresses applied by Fitch in its cash flow analysis consider highly adverse currency movements ranging from 1.4x to 3.0x the current spot rate on both currencies.

The 'AAA' breakeven OC has been revised to 16% from 15%. The main constituent remains the cash flow valuation component (10.9%), driven by the large open foreign exchange position as well as a notable open interest-rate position with 61% of the cover pool generating floating rate income while this proportion is only 2% for the liabilities, for which Fitch applied its published interest rate stresses.

The low credit loss component (4.3%) reflects the large proportion of low-risk public sector German assets in the cover pool. The programme's rating is credit linked to Germany (AAA/Stable/F1+) as 81% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states. This percentage will increase to 92% once the CHF assets are replaced.

The issuer will reduce the open currency position within 30 calendar days, which Fitch views as reasonable. Upon the completion, we will conduct a full review of Commerzbank`s public sector programme.

RATING SENSITIVITIES
The 'AAA' rating 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 5 or lower; or (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 16%; or (iv) the issuer does not reduce the open foreign currency position.

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 IDR, as adjusted by the IDR uplift, of 'A-' and one-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.