(The following statement was released by the rating agency)
FRANKFURT/LONDON, December 27 (Fitch) Fitch Ratings has affirmed
Aareal Bank AG's (Aareal) Long-term Issuer Default Rating (IDR)
at 'A-' and its
Viability Rating (VR) at 'bbb'. The Outlook on the Long-term IDR
is Stable. At
the same time, the agency has placed COREALCREDIT BANK AG's
and Short-term IDRs of 'BBB-' and 'F3' on Rating Watch Positive
and affirmed its
VR at 'bb'. A full list of rating actions is provided at the end
The rating actions reflect Aareal's planned acquisition of
COREALCREDIT from a
company owned by the US financial investor Lone Star. The
price of EUR342m is subject to contractually agreed adjustments
up until the
closing date. According to current plans, the transaction -
which is subject to
the approval of the respective authorities - will be completed
during the first
half of next year.
KEY RATING DRIVERS - AAREAL'S IDRs, VR, SUPPORT RATING, SUPPORT
RATING FLOOR AND
The affirmations of Aareal's Long-term IDR, Support Rating,
Support Rating Floor
and senior debt ratings reflect Fitch's view that its status as
one of Germany's
largest, independent active Pfandbrief issuers continues to
result in a very
high probability that state support would be forthcoming if
support, in Fitch's view, is even more certain in the short-term
and so Aareal's
Short-term IDR at 'F1' is at the higher of two potential
mapping to its 'A-' Long-term IDR. The Stable Outlook is based
on Fitch's view
that support will continue to be forthcoming, although this is
evolving developments around support for EU banks.
The affirmation of Aareal's VR reflects Fitch's expectation that
recurring earnings and capitalisation could benefit slightly
acquisition of the much smaller, Germany-focused COREALCREDIT,
which is being
purchased at a material discount to the net fair value of its
liabilities. On the other hand, the rating also takes into
risk on the acquisition. Taxation and legal risks are by nature
quantify with certainty and the acquisition will absorb
capacity at least in the short-term. Fitch expects that Aareal
will not release
upfront accounting profit from this transaction through dividend
payments in the
early years before the full economic impact of the transaction
Therefore, the affirmation of the VR is based on assumptions
legacy risks at COREALCREDIT are sufficiently ring-fenced and
collateral is trapped at the financial institution in an escrow
On balance, Fitch believes that Aareal's management team is
structuring complex financial transactions and expects that
Aareal will extract
some net profit from the transaction, including the substantial
goodwill it will book upfront.
KEY RATING DRIVERS - COREALCREDIT'S IDRs, VR, SUPPORT RATING,
FLOOR AND SENIOR DEBT
The Rating Watch Positive on COREALCREDIT's IDRs and senior debt
Fitch's expectation that the acquisition will close successfully
in 1H14 and the
positive impact of support it will receive from Aareal. The
future rating level
will factor in a very strong propensity for Aareal to support
underpinned by a profit and loss sharing agreement between the
institutions. The ratings will also factor in Aareal's ability
support either from its own resources or via state support to
Once COREALCREDIT becomes a subsidiary of Aareal, Fitch's
analysis will be based
on an institution (Aareal) being the source of support, rather
than on the
The affirmation of COREALCREDIT's VR reflects Fitch's view that
position will not be affected negatively by the transaction nor
changed from March when the VR was last reviewed. Once the
approved by the authorities, Fitch expects that the bank's
improve before potential capital transfers to Aareal.
profitability for the purpose of consolidation into Aareal's
accounts, once the
transaction is complete, will depend substantially on the
pull-to-par fair value
of assets and liabilities and Aareal's management's ability to
according to plan. Fitch expects that COREALCREDIT's liquidity
will benefit from
Aareal's ready access to funding sources. The profit and loss
will neutralise any profit or loss between the two banks.
RATING SENSITIVITIES - AAREAL's IDRs, SUPPORT RATING, SUPPORT
RATING FLOOR AND
Aareal's IDRs, Support Rating, Support Rating Floor and senior
debt ratings are
sensitive to any change in Fitch's assumptions about the
of extraordinary sovereign support for the bank. In Fitch's
view, there is a
clear intention ultimately to reduce implicit state support for
institutions in the EU, as demonstrated by a series of
and policy initiatives, most recently agreement between the
European Council and
Commission on the Bank Recovery and Resolution Directive. In
Fitch commented on its approach to incorporating support in its
bank ratings in
light of evolving support dynamics for banks worldwide (see
Approach for Addressing Support in Bank Ratings', 'Bank Support:
Paths', and 'The Evolving Dynamics of Support for Banks'
www.fitchratings.com) and followed this with an update in
''Sovereign Support for Banks Update on Position Outlined In
Aareal's Support Rating Floor would be revised lower and its
IDRs and senior debt ratings downgraded if Fitch concludes that
sovereign support has weakened relative to its previous
Aareal's VR is 'bbb', any support-driven downgrade of the bank's
and senior debt ratings would be limited to two notches.
RATING SENSITIVITIES - COREALCREDIT's IDRs, SUPPORT RATING,
SUPPORT RATING FLOOR
AND SENIOR DEBT
Fitch expects to resolve the Rating Watches once the transaction
closed. Fitch's considerations on support for EU banks will
affect the rating
decision. If support considerations are excluded, COREALCREDIT's
would be equalised with Aareal's VR. This would mean a one-notch
COREALCREDIT's Long-term IDR and senior debt ratings and either
or one-notch upgrade of its Short-term IDR.
COREALCREDIT's Support Rating and Support Rating Floor are
sensitive to similar
support considerations as those for Aareal. In addition, if the
Aareal fails to go ahead, its IDRs and senior debt ratings will
be sensitive to
changes to Fitch's view about state support.
RATING SENSITIVITIES - VRs
Aareal's 'bbb' VR is the highest for a German monoline
commercial real estate
lender and benefits from its resilient performance since 2008.
non-performing loan (NPL) ratio will deteriorate once Aareal
COREALCREDIT. COREALCREDIT has a large, albeit rapidly
shrinking, NPL portfolio
which, combined with its weak profitability, is one of the main
reasons for its
VR being at 'bb'.
However, COREALCREDIT has fairly high NPL coverage with loan
compared with its German peers, and the terms of the acquisition
cash collateral against unexpected deterioration of collateral
understands that Aareal has conducted extensive due diligence on
loan portfolio, covering most commercial real estate loans. If
assessment proves to be inadequate - which is not Fitch's base
case - it could
be negative for COREALCREDIT's VR.
Aareal has negotiated protection in the form of cash collateral
and fair value
adjustments for potential taxation and legal risks. If Aareal's
not been sufficiently conservative, the upside for Aareal's
capital generating capacity through this acquisition would be
addition, if Aareal's calculation of the net gain of the
acquisition has been
too optimistic, this would be neutral to negative for the VR,
but if risks
emerge that have not been identified by Aareal in its due
diligence, this would
be negative for the VR.
COREALCREDIT's capital, funding and liquidity will be managed at
level and the profit and loss sharing agreement will mutualise
the two banks'
earnings. Consequently, Fitch would most likely withdraw
COREALCREDIT's VR once
the acquisition is successfully closed.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND
Aareal's and COREALCREDIT's Lower Tier 2 subordination
securities are notched
down one level from the banks' respective VRs to reflect higher
compared with senior unsecured debt instruments in line with
Aareal's hybrid securities, issued by Capital Funding GmbH and
Funding LLC (Delaware), are rated 'BB-'. The instruments'
trigger or an annual profit trigger combined with a regulatory
trigger are reflected in the notes being rated four notches
below Aareal's VRs,
two notches for high loss severity risks and two notches for
Subordinated debt ratings and hybrid ratings are sensitive to
changes of the banks' respective VRs. When the acquisition is
closed, the anchor
VR for COREALCREDIT's subordinated debt is likely to be
Aareal's, rather than
Aareal Bank AG:
Long-term IDR: affirmed at 'A-', Outlook Stable
Short-term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'bbb'
Support Rating: affirmed at '1'
Support Rating Floor: affirmed at 'A-'
Debt Issuance Programme: affirmed at 'A-'/'F1'
Senior unsecured notes: affirmed at 'A-'
Subordinated debt: affirmed at 'BBB-'
Capital Funding GmbH (DE0007070088): affirmed at 'BB-'
Aareal Capital Funding LLC (Delaware) (XS0138973010): affirmed
COREALCREDIT BANK AG:
Long-term IDR: 'BBB-' placed on Rating Watch Positive
Short-term IDR: 'F3' placed on Rating Watch Positive
Viability Rating: affirmed at 'bb'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB-'
Senior unsecured notes: 'BBB-' placed on Rating Watch Positive
Subordinated debt: 'BB-' placed on Rating Watch Positive
+49 69 76 80 76 113
Fitch Deutschland GmbH
60325 Frankfurt am Main
+44 203 530 1579
+44 203 530 1095
Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153,
Additional information is available on www.fitchratings.com
Applicable criteria 'Global Financial Institutions Rating
Criteria', dated 15
August 2012, 'Evaluating Corporate Governance', dated 12
'Assessing and Rating Bank Subordinated and Hybrid Securities',
dated 5 December
2012 and 'Rating FI Subsidiaries and Holding Companies', dated
10 August 2012
are available at www.fitchratings.com.
Sovereign Support for Banks Update on Position Outlined In 3Q13
Support is Key to German Pfandbrief Issuers' Ratings
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Evaluating Corporate Governance
Assessing and Rating Bank Subordinated and Hybrid Securities
Rating FI Subsidiaries and Holding Companies
2014 Outlook: German Banks - Amended
No Signs of Real-Estate Bubble in Germany
Bank Support: Likely Rating Paths
The Evolving Dynamics of Support for Banks
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