Feb 14 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Credit Suisse
AG's (CS, A/Stable/F1) outstanding mortgage covered bonds at 'AAA' with a Stable
Outlook following a periodic review of the programme.
KEY RATING DRIVERS
The rating is based on CS's Long-term Issuer Default Rating (IDR) of 'A', an
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 programme's unchanged breakeven 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 recoveries in excess of 91% should the covered bonds
default, supporting a two-notch uplift to 'AAA'.
The unchanged D-Cap of 3 reflects what Fitch assesses to be moderate high risk
in liquidity gap and systemic risk and in systemic alternative management. The
assessment for liquidity gap and systemic risk is driven by a 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 risks in the cover-pool specific alternative management and
privileged derivative components of the D-Cap have been assessed as moderate,
while that of asset segregation is low.
As of 17 January 2014, the outstanding mortgage covered bonds of CHF8.9bn were
backed by a cover pool with an aggregate outstanding balance of CHF13.9bn of
Swiss residential mortgage loan contracts secured on 26,438 Swiss properties,
with a weighted-average (WA) current loan-to-value of around 68%. The cover pool
is geographically distributed across Switzerland's regions, with the largest
concentrations being in Lake Geneva (23%) and Zurich (22%). Compared with the
last analysis the pool composition changed only marginally in respect to
borrower region, property type, property use and type of interest.
The main drivers of the AP are estimated credit losses 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 maturity mismatches between
the programme's asset and liability profile.
The cover pool's WA asset maturity is approximately 3.5 years. In Fitch`s view
the delivered cash flows do not adequately address the risk of extension of the
fairly short term bullet loans beyond the remaining term in a stressed economic
environment. Fitch has therefore 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 issues 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 (70% in EUR and 30% in USD). The guarantor hedges 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 22.6% and a weighted average recovery rate
of 76.7%, resulting in a weighted average credit loss of 5.3%.
In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be
vulnerable to downgrade if any of the following occurs: (i) the IDR is
downgraded by one or more notches to 'A-' or below; or (ii) the D-Cap falls by
one or more categories to 2 (high risk) or lower; or (iii) the AP that Fitch
considers in its analysis increases above Fitch's 'AAA' breakeven level of
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.