TEXT-Fitch affirms Aareal Bank's public sector pfandbriefe at 'AAA'/stable
(The following statement was released by the rating agency)
Dec 12 - Fitch Ratings has affirmed Aareal Bank's (Aareal, 'A'/Stable/'F1') public sector Pfandbriefe at 'AAA'/Stable following a periodic review of the programme.
The rating is based on Aareal Bank's Long-term Issuer Default Rating (IDR) of 'A-', the Discontinuity Cap (D-Cap) of 5 (low risk) and the overcollateralisation (OC) that Fitch takes into account in it analysis, which is currently 10.3%.
In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) the IDR was downgraded by two or more notches to 'BBB' or lower; or (ii) the D-Cap fell by two or more categories to 3 (moderate high risk) or lower; or (iii) the OC that Fitch considers in its analysis dropped below Fitch's 'AAA' breakeven level of 7.2%.
In its analysis, the agency takes into account the lowest reported OC of the past year (since December 2011), reflecting the Aareal's Short-term IDR of 'F1'.
The D-Cap of 5 (low risk) results from a low risk assessment for 'cover pool-specific alternative management', 'asset segregation' and 'privileged derivatives' components. The components 'systemic alternative management' and 'liquidity gap and systemic risk' have been assessed as very low risk.
The public sector nature of the cover pool primarily supports the low discontinuity risk assessments due to the greater degree of expected liquidity and ease of management of public sector assets compared to mortgage loans. All swaps are with external counterparties, which Fitch believes would be less problematic to manage than intra-group swaps after an issuer default.
As of end September 2012, the exposure to non-'AAA' countries represents around 11.7% of the portfolio. In its analysis, Fitch has assumed the default of the largest non-'AAA' sovereign (3.6%). The programme's rating is credit linked to Germany, as 73% of the assets in the cover pool are directly exposed to or guaranteed by the German sovereign or its federal states.
The main contributor to the 'AAA' breakeven OC is the credit risk of the cover pool. In a 'AAA' stress scenario, Fitch has calculated a credit loss of 8.9%, whereby stressed defaults and recoveries are 12.3% and 27.6%, respectively. The breakeven OC of 7.2% is sufficient to ensure timely payments of the Pfandbriefe in a 'AA+' rating scenario (credit loss 6.6%) and to achieve high recoveries in a 'AAA' scenario supporting a one-notch recovery uplift to 'AAA' of the covered bonds rating.
Asset liability mismatches with regard to maturity and interest rates are relatively limited in this programme and have even further decreased since Fitch's last analysis in December 2011. The initial open position of floating-rate assets has partly been mitigated by the inclusion of privileged interest rate swaps. Fitch has taken all mismatches into account in modelling the expected cash flows by applying appropriate stresses. All assets and Pfandbriefe are euro-denominated.
As of end-September 2012, Aareal's public sector Pfandbriefe amounting to EUR2.9bn were secured by a EUR3.1bn cover pool, which led to a nominal OC of 10.3%.
The Fitch breakeven OC for the covered bond rating will be affected by, amongst 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.