Fitch Assigns Commerzbank AG's Public Sector Pfandbriefe Final 'AAA' Ratings

Tue Jun 25, 2013 11:47am EDT

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(The following statement was released by the rating agency) FRANKFURT/LONDON, June 25 (Fitch) Fitch Ratings has assigned Commerzbank AG's (CBK; A+/Stable/F1+) outstanding public sector Pfandbriefe and first five-year fixed rate issuance of EUR0.5bn under its new programme a final 'AAA' rating with a Stable Outlook. The previous outstanding Pfandbriefe consisted of 52 bonds totalling EUR1.03bn issued by Deutsche Schiffsbank, a former private bank owned by CBK. KEY RATING DRIVERS The 'AAA' rating on CBK's public sector covered bonds Programme is based on CBK's Long-Term Issuer Default Rating (IDR) of 'A+', the Discontinuity Cap (D-Cap) of 5 and overcollateralisation (OC) between the cover pool and the covered bonds of at least 18%. This level of OC supports a 'AA' rating on a probability of default (PD) basis and allows for a two-notch recovery uplift for the covered bonds in a 'AAA' scenario. The Fitch breakeven 'AAA' OC level of 18% is unchanged compared to the level communicated at the time of the expected rating assignment. This is driven by the fact that the conditions of the first issuance were equal to those applied in the agency's preliminary analysis. In addition, in its analysis the agency still applied the cover pool as of end April. 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, it cannot be assumed to remain stable over time. The Fitch breakeven 'AAA' OC is mainly driven by the combination of maturity mismatches and the surplus of fixed-rate bonds over fixed-rate assets. While the cover pool consists of a significant portion of floating rate assets (51%) and has a weighted average life (WAL) of around 5.7 years, the Pfandbriefe incorporating the first issuance pay almost exclusively a fixed coupon and have a WAL of at least 8.1 years. As a result, temporary liquidity surpluses arise, resulting in significant negative carry for the programme assuming a reinvestment rate of near zero. The first issuance pays a fixed coupon of 1% p.a. which is significantly below the average coupon of around 4.3% on the outstanding fixed-rate Pfandbriefe and therefore decreases the existing mismatches to some extent. As of 30 April 2013, the cover pool of around EUR1.9bn consisted mainly of exposure to German Federal States (41%) and to German Landesbanks that benefit from a statutory guarantee known as Gewaerhrtraegerhaftung (17%). Furthermore, the cover pool included export financing loans (31%) that are guaranteed by Euler Hermes in the name and on behalf of the Federal Republic of Germany. The guarantee (Verbriefungsgarantie) covers the full loan amount. In total, around 90% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states and as a result, CBK's public sector Pfandbriefe rating is credit linked to Germany (AAA/Stable/F1+). Fitch has analysed the portfolio using its criteria for the analysis of public-sector pools. In a 'AAA' scenario, Fitch calculated a stressed credit loss of 3.2%, whereby the stressed defaults and recoveries in this scenario are 3.7% and 13.5%, respectively. The D-Cap of 5 (low risk) results from a low risk assessment for the asset segregation, the liquidity gap and systemic risk and cover pool-specific alternative management components. The systemic alternative management has been assessed as very low risk. There are no derivatives registered in the cover pool. The programme is not exposed to currency risk, as all cover assets and outstanding Pfandbriefe are euro-denominated. RATING SENSITIVITIES 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 four or more notches to 'BBB' or lower; or (ii) the D-Cap fell by four or more categories to 1 (very high risk) or lower; or (iii) the OC that Fitch considers in its analysis dropped below Fitch's 'AAA' breakeven level of 18%; or (iv) the Federal Republic of Germany is downgraded by one or more notches to 'AA+' or lower. More details on the programme's structure and Fitch's analysis are available in the new issue report, which will shortly be available at www.fitchratings.com. Contact: Primary Analyst Benjamin Heinrich Associate Director +49 69 768076 126 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analyst Traycho Nikolov Associate Director +49 69 768076 150 Committee Chairperson Susanne Matern, CFA Senior Director +49 69 768076 237 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria: 'Covered Bonds Rating Criteria', dated 10 September 2012, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 13 May 2013, 'Covered Bonds Rating Criteria - Public Sector Spread Liquidity and Spread Assumption Addendum ', dated 01 February 2013 and 'Asset Analysis Criteria for Covered Bonds of European Public Entities', dated 30 January 2013 are available at www.fitchratings.com. Applicable Criteria and Related Research: Counterparty Criteria for Structured Finance and Covered Bonds here Covered Bonds Rating Criteria - Public Sector Liquidity and Spread Assumption Addendum here Asset Analysis Criteria for Covered Bonds of European Public Entities here Covered Bonds Rating Criteria - Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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