March 13 (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'.
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
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.