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 85.0%.
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.