RPT-Fitch affirms Landesbank Baden-Wuerttemberg's public sector pfandbriefe at 'AAA'; outlook stable
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Dec 13 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Landesbank Baden-Wuerttemberg's (LBBW; A+/Stable/F1+) public sector Pfandbriefe at 'AAA' with a Stable Outlook, following a periodic review of the programme.
KEY RATING DRIVERS
The rating is based on LBBW'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 its analysis, which is currently 43%. In its analysis, the agency relies on the lowest OC observed within the past year, reflecting the issuer's 'F1+' Short-term IDR. The level of OC Fitch relies upon supports a 'AAA' rating on a probability of default (PD) basis.
The unchanged D-Cap of 5 (low risk) results from the low risk assessment assigned to the liquidity gap & systemic risk, the cover pool specific alternative management and the asset segregation components. The systemic alternative management and privileged derivatives components have been classified as very low risk.
Fitch modelled the credit risk of the portfolio using its 'Asset Analysis Criteria for Covered Bonds of European Public Entities'. In a 'AAA' scenario, Fitch calculated a stressed credit loss of 4.5%, whereby the stressed defaults and recoveries are 14.2% and 68.3%, respectively.
LBBW's public sector Pfandbrief rating is credit linked to Germany (AAA/Stable/F1+) as around 42% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states. Around 97.0% of the total cover pool represents exposure to German obligors.
Fitch's 'AAA' breakeven OC has increased to 8.0% from 7.5%. The main driver of the new breakeven OC is the programme's existing maturity mismatch, which Fitch assesses as the difference between the present values of the programme's assets and liabilities. This present value difference is calculated under a stressed interest rate environment and accounts for around 3.5% of the final breakeven OC. Additional drivers of the breakeven OC are the credit loss of 2.2% in a 'AA' stress scenario and the sales and reinvestment costs, which stem from the necessity to liquidate cover assets to assure timely payments on the covered bonds post issuer default.
As of 30 September 2013, LBBW's EUR21.8bn outstanding public sector Pfandbriefe were secured by a cover pool of EUR35.6bn, resulting in nominal OC of 63%.
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) LBBW's IDR was downgraded by four or more notches to 'BBB' or below; (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 8.0%; or (iv) if Germany was downgraded below 'AA-'. An OC of 0% on a nominal or 2% on a NPV basis, as required by German Pfandbrief legislation, would trigger a two-notch downgrade to 'AA'.
The Fitch breakeven OC for the covered bond rating will be affected, among other factors, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore the breakeven OC for the covered bond rating cannot be assumed to remain stable over time.
More details on the portfolio and Fitch's analysis will be shortly available in a credit update at www.fitchratings.com.
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