Fitch affirms Credit Suisse AG's mortgage covered bonds at 'AAA'; outlook stable
March 13 (Reuters) - (The following statement was released by the rating agency) March 13 (Fitch) Fitch Ratings has affirmed Credit Suisse AG's (CS, 'A'/Stable/'F1') outstanding mortgage covered bonds at 'AAA' with a Stable Outlook. The affirmation follows the conclusion of Fitch's periodic review of the credit risk of the cover pool and the cash flow mismatches between the programme's assets and liabilities. KEY RATING DRIVERS The rating is based on CS's Long-term Issuer Default Rating (IDR) of 'A', the Discontinuity Cap (D-Cap) of 3 (Moderate High Risk) and the asset percentage (AP) that Fitch takes into account in its analysis, which is currently 85.0%. This equals the program's contractual AP of 85.0% supporting a 'AA' rating on the covered bonds on a probability of default (PD) basis. In addition it is sufficient to achieve outstanding recoveries from the cover pool should the covered bonds default, supporting a two-notch uplift to 'AAA'. RATING SENSITVITIES 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 one or more notches to 'A-' or below; or (ii) the D-Cap fell by one or more categories to 2 (high risk) or lower; or (iii) the AP that Fitch considers in its analysis increased above Fitch's 'AAA' breakeven level of 85.0%. The D-Cap of 3 is driven by the moderate high risk assessment of the liquidity gap and systemic risk and the systemic alternative management components. The assessment for liquidity gaps and systemic risk is driven by the nine-month pre-maturity test while the assessment for systemic alternative management reflects the absence of a third-party loan servicing market and the assumed ability of the guarantor to take over the cover pool and repay the covered bonds in time. The cover-pool specific alternative management and privileged derivative components of the D-Cap have been assigned an assessment of moderate risk, while asset segregation is of low risk. As of 21 December 2012, the cover pool consisted of approximately 37,879 residential mortgage loan contracts secured on Swiss properties, with an aggregate outstanding balance of CHF12.9bn and a weighted-average (WA) current loan-to-value of 68%. The covered bonds are collateralised by a pool of CHF-denominated residential mortgage loans originated by CS. The cover pool's WA asset maturity is approximately 3.4 years. The delivered cash flows do not adequately address the risk of extension of the relatively short term bullet loans beyond the legal maturity in a stressed economic environment. Fitch therefore has formed assumptions about the maturity profile of the cover pool's assets under a 'AAA' stress scenario to better reflect potential mismatches between the cover pool and the covered bond issuances in a wind-down scenario arising from possible extensions of the loans. For the extended asset cash flow profile Fitch has calculated a weighted average remaining life of approximately 11 years. All of the issued covered bonds are fixed rate and denominated in foreign currencies (53% in EUR and 47% in USD). The guarantor will hedge interest rate and foreign exchange risks between the cover assets and the covered bonds by entering into a series of swaps. CS acts as swap provider, subject to collateralisation and best effort replacement triggers. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 23.7% and a weighted average recovery rate of 76.6% resulting in a weighted average credit loss of 5.6%. The cover pool is geographically distributed across Switzerland's regions, with the largest concentrations being in Lake Geneva (22.7%) and Zurich (22.5%). Compared to the last analysis the pool composition changed only slightly in respect to borrower region, property type, property use and type of interest. The main driver of the AP are the estimated credit loss and the need to sell assets from the cover pool, potentially in a stressed market environment and for a depressed price. The sale of assets is driven by the maturity mismatches between the programme's assets and liabilities. The Fitch breakeven AP for the covered bond rating will be affected, amongst 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 AP to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the portfolio and Fitch's analysis will be available in a full rating report, which will shortly be available at www.fitchratings.com.
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