(The following statement was released by the rating agency)
Nov 22 - Fitch Ratings has assigned KBC Bank SA/NV’s (KBC; ‘A-'/Stable/‘F1+') fixed rate mortgage covered bonds - pandbrieven - of up to EUR1.25bn an expected ‘AAA(EXP)’ rating with a Stable Outlook.
The rating is based on KBC’s Long-Term IDR of ‘A-', a Discontinuity Cap (D-Cap) of 4 (moderate risk) and overcollateralisation (OC) of at least 48%, based on a liability profile incorporating a five-year issuance as communicated by the issuer.
The Stable Outlook on the covered bond rating mirrors the Stable Outlook on KBC’s Long-Term Issuer Default Rating (IDR) and the agency’s stable expectations for both the cover assets and OC maintenance. Although the Outlook on Belgium’s sovereign rating (‘AA’/‘F1+') is Negative, a one-notch downgrade would not lead to a downgrade of the covered bonds.
In terms of the sensitivity of the covered bonds’ rating, the ‘AAA’ rating would be vulnerable to a downgrade, all else being equal, if one of the following occurred: KBC’s IDR was downgraded to ‘BBB+', or if the D-Cap worsened by at least one category, to D-Cap 3 (moderate-high discontinuity risk) or the OC level decreased below 48.0%, which is the minimum OC in line with the ‘AAA’ covered bond rating.
This breakeven OC supports a ‘AA’ rating on a probability-of-default (PD) basis and further two-notches based on stressed 91% recoveries given default on the pandbrieven. The breakeven OC for the rating will be affected, among others, by the profile of the covered bonds compared to the cover assets. Therefore it cannot be assumed to remain stable over time.
The D-Cap of 4 for this programme reflects the moderate risk of discontinuity of payments on pandbrieven assuming an insolvency of KBC. If KBC defaults, the pandbrieven benefit from a 12-month maturity extension and a pre-funded reserve covering three months of interest, resulting in a moderate risk assessment of the liquidity gap and systemic risk component of the D-Cap. The same moderate risk assessment applies to the cover pool-specific alternative management section of the D-Cap, based on a capable in-house developed IT system but taking into account the specifics of the management of all-sums mortgages and mandates.
Fitch has assessed asset segregation as representing a low discontinuity risk, given the protection provided by the pandbrieven legislative framework against commingling, set-off and claw back risk. There is a residual risk of some cover assets being returned to the issuer’s insolvency estate, if it can be established with certainty that they will not be needed to repay covered bonds. The same low risk assessment applies to the systemic alternative management section of the D-Cap, incorporating the role of the cover pool monitor and of the special estate administrator under Belgian law.
As there are no privileged derivatives registered in this programme, the associated risk is deemed very low for the purpose of the D-Cap assessment.
The provisional cover pool (EUR3.6bn as of September 2012), consists of first-ranking Belgian housing loans to prime borrowers. The portfolio’s weighted average (WA) original mortgage-to-value ratio (OMTV) is 83.3%, with a WA current indexed loan-to-value (LTV) of 72.0%. 62% of the loans are partially secured by a mortgage mandate. For such loans, Fitch applied low recoveries given default, as no actual security has been put in place initially; rather, a right to register a mortgage exists. The agency has calculated a ‘AAA’ cumulative credit loss of 7.6%.
All loans in the cover pool are fixed rate. Post issuer default, this exposes the portfolio to significant market value loss in a stressed upward interest rate environment. In a ‘AAA’ scenario, the agency has assumed a 40% haircut in case of liquidation of the cover assets. Based on a liability profile communicated by the issuer, the initial covered bonds are expected to have a maturity of five years, which is less than the 11.1 years for the cover assets. Combined with the stressed refinance rate applied to a fixed rate pool, maturity mismatches account for a large part of the ‘AAA’ breakeven OC.
Link to Fitch Ratings’ Report: KBC Bank NV