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(The following statement was released by the rating agency)
Feb 11 - Programme features rather than the nature of the underlying assets were the key factor in determining how we approached Commerzbank's SME Structured Covered Bond Programme, and our decision to apply our covered bond criteria rather than structured finance criteria, Fitch Ratings says. The programme is not governed by the German Pfandbrief regulation because the underlying SME loans are not eligible for inclusion in Pfandbrief cover pools.
The launch of the programme continues the recent trend for the covered bond market to grow in terms of jurisdictions, structures, and asset types.
We assigned the programme AA(EXP)/Stable ratings in December under our covered bond criteria. Even though a number of features are new compared with the German Pfandbrief market, they are used in covered bonds elsewhere and most of the structural elements have been seen in other jurisdictions.
Most important for Fitch's classification of the programme as a covered bond programme is that the bonds are issued by the bank rather than an SPV, and investors have dual recourse to the bank and, should it fail, against the underlying loans.
As is common in covered bond programmes, the bank must maintain a certain level of over collateralisation. That is different from structured finance transactions, where credit enhancement will typically not be increased by the originator after the transaction is launched. In addition, issuance is untranched, and the loan portfolio has to be supported by the bank if the credit quality deteriorates. These are common features of covered bond programmes but not structured finance transactions.
Another important feature - the switch to pass-through mechanism - is also not new in covered bonds. Bonds issued under the Commerzbank programme would switch to pass-through payments if the issuer defaulted and the guarantor (the SPV that owns the cover pool) did not have enough cash to repay a maturing bullet bond at its expected date. While pass-through payments from the start are common in in structured finance transactions, Fitch has rated covered bond programmes with a switch to pass-through redemption in countries such as the UK.
Other elements typically seen in structured finance, such as the contractual rather than legislative basis for the programme, and the presence of an SPV (albeit not as issuer), have been seen in covered bond programmes in other jurisdictions, such as Canada and New Zealand.
Our analysis of Commerzbank's SME structured covered bond programme, and the prospects for this asset class in Germany, were among the topics discussed at Fitch's "Funding SMEs - Securitisation vs Covered Bonds" held in Frankfurt last Wednesday. Details, including presentations, are available at www.fitchratings.com.