Fitch Affirms Commerzbank AG's Mortgage Pfandbriefe at 'AAA'; Outlook Stable
KEY RATING DRIVERS
The rating is based on CBK's Long-term Issuer Default Rating (IDR) of 'BBB', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the lowest level of overcollateralisation (OC) of the last 12 months, currently at 82.0%.
The D-Cap of 4, which reflects a moderate payment interruption risk, is unchanged from Fitch's previous review. The weakest link in the D-Cap remains the liquidity gap and systemic risk, which Fitch assesses as 'moderate'.
The programme's 'AAA' breakeven OC has increased to 10%, from 9% at the previous review. The main driver of the breakeven OC remains the asset disposal loss component of 7.1%, which reflects the need for forced asset sales to ensure timely payment of all outstanding Pfandbriefe post issuer default.
Fitch determined an issuer default shortly prior to the maturity of CBK's newly issued EUR1bn Pfandbrief as the worst case regarding default timing. In the analysis, Fitch additionally took into consideration that the cover pool, in Fitch's view, at the time of the assumed issuer default will have a higher seasoning compared with the current pool, despite being replenished.
The credit loss component of 5.9% in the breakeven OC has increased since the last review. CBK does not disclose prior charges in its reporting provided to Fitch. We consequently assessed this missing component based on conservative assumptions, which led to the increase in credit losses from last year's 4.2%.
Fitch tested for annual prepayments of 0% to 10% and found zero prepayments to be the worst case assumption. To determine its breakeven OC level, Fitch used a prepayment assumption of 5%. This reflects the possibility of the alternative manager (Sachwalter) to actively influence the borrower`s repayment behaviour at the interest reset date.
Fitch's cash flow valuation component of 3.2% (up from -10.2% a year ago) reflects the difference between the stressed present values of the programme's assets and liabilities; the increase compared with last year's analysis results from a change in the worst case scenario with respect to the assumed path of future interest rates.
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded below 'BBB'; or (ii) the total number of notches represented by the D-Cap is reduced to 3 or lower; (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 covered bonds following an issuer default. As a result, the covered bond rating would likely be downgraded to 'A+', reflecting outstanding recoveries and a two-notch recovery uplift above the issuer's IDR, adjusted for the IDR uplift.
The Fitch breakeven OC for the covered bond rating will be affected by, among other factors, 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.
Commerzbank`s subsidiary Hypothekenbank Frankfurt, in wind-down since 2012, still has significant amounts of outstanding Pfandbriefe. The mortgage Pfandbriefe of Hypothekenbank Frankfurt are mainly backed by commercial real estate loans. At present it is not clear whether Hypothekenbank Frankfurt`s Pfandbriefe programme will be merged with Commerzbank`s Pfandbriefe programme and if so, to what extent commercial real estate loans will be included as cover assets. In case of a merger of the two programmes, Fitch will review the Pfandbriefe rating. A larger credit loss, and subsequently an increase of breakeven OC, would be expected if the commercial assets remain in the pool given that Fitch generally views commercial real estate loans as higher-risk than standard residential mortgage loans currently included in the issuer`s mortgage Pfandbriefe cover pool.
More details on the portfolio and Fitch's analysis will be available in a credit update, which will shortly be available at www.fitchratings.com.