Fitch Assigns Commerzbank AG's Mortgage Pfandbriefe Final 'AAA' Rating; Outlook Stable

Thu Oct 17, 2013 12:43pm EDT

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(The following statement was released by the rating agency) FRANKFURT/LONDON, October 17 (Fitch) Fitch Ratings has assigned Commerzbank AG's (CBK; A+/Stable/F1+) first seven-year fixed rate issuance of EUR0.5bn under its new programme a final 'AAA' rating with a Stable Outlook. KEY RATING DRIVERS The rating on CBK's mortgage Pfandbrief is based on CBK's Long-Term Issuer Default Rating (IDR) of 'A+', an assigned Discontinuity Cap (D-Cap) of 4 (moderate risk) and the over-collateralisation (OC) between the cover pool and the Pfandbrief of at least 10.0%. This level of OC supports a 'AA' rating on a probability of default basis and allows for a two-notch uplift for outstanding recoveries given default. The Fitch breakeven 'AAA' OC level of 10.0% is lower than the level communicated at the time of the expected rating assignment. This is driven by the lower coupon payable on the first issuance of 1.625% p.a. than the coupon modelled in the agency's preliminary analysis. In its analysis the agency applied the pool data delivered as of mid-September, as CBK confirmed that the assets are registered for the benefit of the Pfandbrief holders. The D-Cap of 4 is driven by the moderate risk assessment of the liquidity gap and systemic risk component. The systemic alternative management and asset segregation are equivalent for all German Pfandbrief programmes and assessed as very low risk and low risk respectively. The cover pool-specific alternative management component is assessed as low risk and the privileged derivative component as very low risk. There are no derivatives registered in the cover pool. RATING SENSITVITIES The 'AAA' rating of CBK's mortgage Pfandbriefe would be vulnerable to a downgrade if: (i) CBK's IDR is downgraded by three or more notches to 'BBB+' or lower; (ii) the D-Cap falls by three or more categories to 1 (very high risk) or lower; or (iii) the OC that Fitch considers in its analysis drops below the agency's 'AAA' breakeven level of 10.0%. If the OC that Fitch considers in its analysis drops to the legal requirement of 2% excess OC on a net present value basis, it would not be sufficient to allow for timely payment of the Pfandbriefe following an issuer default. As a result, the Pfandbriefe rating would be downgraded to 'AA' reflecting outstanding recoveries and thus a two-notch rating uplift above Commerzbank's IDR. PROGRAMME CHARACTERISTICS The cover pool consists of 2,848 residential mortgage loans secured by properties located in Germany with a total outstanding balance of EUR0.78bn. By end-December 2013, CBK expects the cover pool to increase above EUR1bn. Of the loans 95.1% are annuity loans; the remainder are bullet loans. Only 0.1% of the loans are floating-rate. The seasoning of the portfolio averages two years. The weighted average (WA) remaining term to maturity averages 24 years. The maximum loan amount on a borrower level in the cover pool accounts to EUR6.2m. In a 'AAA' stress scenario, Fitch calculated a default rate of 24.8% and a recovery rate of 71.9% for the cover pool, resulting in a loss of 7.0%. Because the redemption profile of the bonds does not match the amortisation of the cover pool, the regular asset cash flows may not be sufficient to redeem maturing Pfandbriefe, resulting in the need to sell assets. The cover assets are amortising with a weighted average remaining term to maturity of around 24 years based on the calculated final maturity date, while that of the assumed Pfandbriefe is seven years. Fitch models asset sales at a stressed price leading to a higher breakeven OC and more assets to be sold. The breakeven OC level calculated by Fitch is highly sensitive to prepayment assumptions and varying bond maturities. The Pfandbriefe are payable in full at bond maturity while the assets provide incoming cash flows over a longer time period. The cash flow profiles are well-matched in terms of interest rates and currencies. All cover assets and the covered bonds are EUR-denominated. The loans in the initial cover pool predominantly carry a fixed interest rate (initially 99.9%), while the covered bonds pay a fixed coupon. Fitch has taken these mismatches into account when modelling the expected cash flows by applying stresses to interest rates movements. More details on the programme's structure and Fitch's analysis will be published in the new issue report which will shortly be available at www.fitchratings.com. Contact: Primary Analyst Kai-Uwe Richter, CFA, FRM Associate Director +49 69 76 80 76 131 Fitch Deutschland GmbH D-60325 Frankfurt am Main Secondary Analyst Eberhard Hackel Senior Director +49 69 76 80 76 117 Committee Chairperson Susanne Matern, CFA Senior Director +49 69 76 80 76 237 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available at www.fitchratings.com Applicable criteria, 'Covered Bonds Rating Criteria', dated 04 September 2013, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 13 May 2013, 'EMEA RMBS Master Criteria', dated 6 June 2013, 'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' dated 3 June 2013 and 'EMEA Criteria Addendum - Germany' dated 13 June 2013 are available at www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here EMEA RMBS Master Rating Criteria here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here EMEA Criteria Addendum — Germany 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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