(The following statement was released by the rating agency)
Feb 28 - Fitch Ratings has assigned Commerzbank AG's (CBK; 'A+'/Stable/'F1+') five-year fixed rate SME Structured covered bonds of EUR0.5bn a final 'AA' rating with a Stable Outlook.
The rating is based on CBK's Long-Term Issuer Default Rating (IDR) of 'A+', a Discontinuity Cap (D-Cap) of 8 (minimal discontinuity), and overcollateralisation (OC) of at least 11.3%. This level of OC would provide outstanding recoveries in a 'AA' scenario, supporting a two-notch uplift to 'AA' of the covered bonds rating from the bank's IDR.
This level has decreased to 11.3% from 12.1% as compared to the level communicated at the time of the expected rating assignment. This is driven by the lower fixed interest rate payable on the first issuance, which is 1.5% p.a., compared to the assumption of 1.75% p.a. applied in the agency's preliminary analysis.
However, an OC of 11.3% would not be enough to de-link the default likelihood of the covered bonds from that of CBK. The level of OC supporting a 'A+' rating on a probability-of-default (PD) basis, irrespective of CBK's rating, and outstanding recoveries given default in a 'AA' scenario now stands at 18.9% (down from 19.3% in the preliminary analysis) which remains below the initial contractual OC of 21%.
The 'AA' bonds rating would be vulnerable to a downgrade, all else being equal, if one of the following occurred: CBK's IDR was downgraded below 'BB-' or the OC level decreased below 11.3%, which is the minimum OC in line with the 'AA' covered bond rating. All else being equal, the 'AA' rating is not vulnerable to a worsening in D-Cap.
The D-Cap of 8 for this programme reflects the minimal risk of discontinuity of payments on the covered bonds assuming an insolvency of CBK. If CBK defaults, the covered bonds benefit from a pass-through mechanism (should there be insufficient funds to repay maturing bonds at their expected date) and the existence of a separate liquidity facility for each bond after a rating trigger breach.
The cover pool of EUR0.605bn consists of 1,102 loans granted to German companies, classified as SMEs by CBK. The loans in the cover pool are predominantly short-term money market loans (57%) or medium-term investment loans (42%). The pool has slightly reduced in size (down from EUR0.650bn for the preliminary pool) but is more granular now with 887 borrowers instead of 486.
The contractual weighted average life (WAL) of the portfolio increased to 1.1 years from 0.6 since the preliminary analysis. However, Fitch has modelled all loans with an extended maturity to account for the increased default risk of such short-term loans should CBK not be willing or able to refinance bullet loans. The agency assumed a minimum WAL of two years for all loans. As a consequence, the assumed WAL of the portfolio for the credit model only slightly increased to 2.3 years from 2.2. The agency has calculated a 'AA' cumulative credit loss of 16.8%, up from 15.7% during the preliminary analysis.
The covered bonds' redemption profile does not match the amortisation of the cover pool. The agency assumed a WAL of 2.3 years for the cover assets, while the covered bonds have an expected bullet maturity of five years. As a result, temporary liquidity surpluses may arise, resulting in significant negative carry for the programme assuming a reinvestment rate of near zero. The cash flow profiles of assets and liabilities are well-matched in terms of interest rates and currencies. All cover assets and the covered bonds are EUR-denominated. The loans in the cover pool predominantly carry a fixed interest rate (initially 73%), while the covered bonds pay a fixed coupon. Fitch has taken these mismatches into account when modelling the expected cash flows by applying stresses to interest rates movements. However, a switch to pass-through of the bonds is also associated with a change in interest rate type from fixed to variable which could create a significant open interest position.
More details on the programme's structure and Fitch's analysis are published in the new issue report which is available by clicking the link above or at www.fitchratings.com.
Link to Fitch Ratings' Report: Commerzbank AG - SME Structured Covered Bond Programme