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Feb 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Hypothekenbank Frankfurt International S.A.’s (HFI, A-/Stable/F1) Lettres de Gage Publiques (LdGPs) at ‘A’ with Stable Outlook following a periodic review of the programme.
Key Rating Drivers
The rating is based on HFI’s Long-term Issuer Default Rating (IDR) of ‘A-', an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the level of over-collateralisation (OC) the agency takes into account in its analysis. HFI’s covered bond programme is in wind-down and according to its criteria the agency would only give credit in its analysis to a public OC statement by the issuer.
As HFI has no such public statement in place, Fitch only takes into account the legal minimum of 2%. This level of OC allows for superior recoveries in the agency’s ‘A’ stress scenario, resulting in the LdGP being rated one notch above HFI’s Issuer Default Rating (IDR) of ‘A-'. The Stable Outlook on the covered bonds reflects that on HFI’s IDR.
The unchanged D-Cap of 4 (moderate risk) results from what Fitch assesses to be moderate risk for the liquidity gap and systemic risk, cover pool-specific alternative management and privileged derivatives components. The asset segregation and systemic alternative management components have been assessed as very low risk. Although the D-Cap of 4 would allow the covered bonds to be rated up to ‘AAA’, the OC Fitch takes into account in its analysis does not support a covered bonds rating above ‘A’.
In its asset analysis the agency calculated a default rate of 14% and a recovery rate of 27% in a ‘A’ stress scenario. The resulting loss rate of 10% and significant currency mismatches, mainly USD and GBP, between its assets and liabilities remain the main risk factors in the programme.
As of end-September 2013 the LdGPs amounted to EUR10.2bn and were secured by a cover pool of public-sector assets amounting to EUR10.9bn. The cover pool comprised 538 assets, which Fitch assigned to 178 ultimate debtors in its analysis. The largest regional concentrations were in the U.S. (30%), the UK (23%) and Canada (9%).
A considerable portion of the cover pool relates to US Federal Family Education Loan Program (FFELP) Student Loan ABS that is ultimately guaranteed by the US sovereign. In total, exposure to the US sovereign represents 22% of the outstanding portfolio. Since the US sovereign’s rating of ‘AAA’ (on Rating Watch Negative) exceeds the LdGPs’ ‘A’ rating, this significant concentration with one single borrower currently does not pose a risk for the rating of the LdGPs. Apart from the US sovereign, the largest debtor groups are British (22%) and Canadian (9%) subnational entities.
In terms of sensitivity of the covered bonds’ rating, the ‘A’ rating would be vulnerable to downgrade i) if HFI’s IDR is downgraded by one or more notches to ‘BBB+’ or lower ii) the OC that Fitch considers in its analysis would no longer support recoveries sufficient for a one-notch uplift.
More details on the portfolio and Fitch’s analysis will be available in a credit update, which will be shortly available at www.fitchratings.com.