(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
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