TEXT-Fitch assigns Swiss covered bonds D-caps and outlooks

Sept. 14 - Fitch Ratings has assigned UBS AG's (UBS, 'A'/Stable) and Credit Suisse AG's (CS, 'A'/Stable) mortgage covered bonds Discontinuity Caps (D-Caps) following the publication of the agency's updated Covered Bonds Rating Criteria. Fitch has assigned a Stable Outlook to both programmes' 'AAA' rated covered bonds. The Stable Outlooks reflect the Stable Outlook on the sovereign's and issuers' Issuer Default Ratings (IDR) as well as Fitch's expectation that both the asset performance and over-collateralisation will remain stable. The D-Caps of 3 (moderate high risk), which have been assigned to the Swiss programmes, determine the maximum rating notch uplift from the IDR to the covered bond rating on a probability of default (PD) basis reflecting Fitch's view of the likelihood of a programme defaulting in the aftermath of an issuer default. For cases apart from a D-Cap of 8 (minimal discontinuity), the D-Cap is based on the highest risk assessment of the following five components: asset segregation, liquidity gap and systemic risk, systemic alternative management and cover pool-specific alternative management and privileged derivatives. Fitch has assigned a low risk assessment of asset segregation for CS's covered bonds and moderate risk for UBS's covered bonds. This assessment reflects the agency's view of uncertainty from the residual claw back risk for both contractual programmes. Fitch is of the opinion that set-off risk might impose some uncertainty for UBS's programme thus a moderate risk assessment was assigned. For both Swiss programmes the liquidity gap and systemic risk is assessed as moderate high and driven by the contractual protection mechanisms against liquidity shortfalls post assumed issuer default in combination with the time assessed by Fitch required to sell cover pool assets. Protection against liquidity gaps is provided for both programmes by the nine month pre-maturity test and a cash reserve covering rolling three months of interest payments due on the covered bonds. The systemic alternative management risk component of the programmes is assessed as moderate high risk and reflects the overall complexity of the contractual programme, third parties involved and the assumed ability of the guarantor to take over the cover pool and repay the covered bonds in time. The guarantor is entitled to sell assets, enter into derivative contracts and raise liquidity in order to make timely payments on the covered bonds as they become due. Fitch views the roles being performed post issuer default by the guarantor, when the initial roles fulfilled by the issuers would need to be replaced, as significant. There is no certainty about the guarantor's experience to appoint relevant replacement third parties. The cover pool-specific alternative management risk assessment is moderate risk for both mortgage programmes having market standard IT systems and providing detailed and timely loan by loan data delivery. The risk assessment for privileged derivatives is moderate for both programmes, based on the high materiality of the exposure and the fact that derivatives are provided by internal counterparties. The programmes' D-Caps and the risk assessment of the D-Cap components are as follows: Credit Suisse AG ('A'/Stable/'F1') Mortgage covered bond rating: 'AAA'/Stable D-Cap: 3 (moderate high risk) Asset segregation: low Liquidity gap and systemic risk: moderate high Cover pool-specific alternative management: moderate Systemic alternative management: moderate high Privileged derivatives: moderate The drivers of the D-Cap are the moderate high risk assessments for 'liquidity gap and systemic risk' and 'systemic alternative management'. UBS AG ('A'/Stable/'F1') Mortgage covered bond rating: 'AAA'/Stable D-Cap: 3 (moderate high risk) Asset segregation: moderate Liquidity gap and systemic risk: moderate high Cover pool-specific alternative management: moderate Systemic alternative management: moderate high Privileged derivatives: moderate The drivers of the D-Cap are the moderate high risk assessments for 'liquidity gap and systemic risk' and 'systemic alternative management'. Contacts: Primary Analyst (Credit Suisse AG, UBS AG) Kai-Uwe Richter Associate Director +69 768076 131 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analyst (Credit Suisse AG, UBS AG) Mathias Pleissner Associate Director +69 768076 133 Committee Chairperson Suzanne Albers Senior Director +44 20 3530 1165 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com.