(The following statement was released by the rating agency)
Feb 20 - LONDON Fitch Ratings has affirmed NORD/LB COVERED FINANCE BANK
S.A.'s (CFB, 'A'/Stable/'F1') Lettres de Gage Publiques (LdGP) at 'AAA'/Stable.
The affirmation follows the implementation of the agency's updated criteria in
'Fitch: Criteria for the Asset Analysis of European Public Entities' Covered
Bonds', dated 30 January 2013 at www.fitchratings.com. Following Fitch's
communication of its updated breakeven overcollateralization (OC) levels, CFB
has informed Fitch that it intends to increase the OC by the end of March. Due
to the issuer's Short-term Issuer Default Rating (IDR) of 'F1' and Long-term IDR
of 'A', the agency deems this period of time short enough and still consistent
with a 'AAA' rating on the LdGP.
In addition, the issuer has informed Fitch that until the end of March all swap
contracts will be with intragroup entities only. Although the contracts are not
fully compliant with Fitch's covered bond counterparty criteria, the agency's
risk assessment for privileged derivatives is still moderate. This is due to
replacement and collateral provisions as well as the fact that the intragroup
entities are currently eligible counterparties under Fitch criteria.
However, as potential termination payments due to defaulted counterparties rank
pari passu to payments to LdGP holders, the agency recognises increased
liquidity risks. To take this into account, Fitch has revised its assessment of
liquidity gaps and systemic risks to 'moderate high' from 'moderate'. Since this
component now poses the highest risk within Fitch's discontinuity analysis, the
D-Cap has been revised to 3 from 4. This still enables the programme to be rated
up to 'AA' on a probability of default basis and up to 'AAA' when taking
recoveries into account.
For this programme Fitch has determined an OC level of 19.9% to be sufficient to
avoid a default of the covered bonds in a 'AA' scenario. In line with its
criteria the agency additionally modelled the recoveries expected from the cover
pool in case of default of the covered bonds subject to 'AAA' stress scenarios.
In all scenario runs recoveries exceeded 91%. This allows a rating uplift for
the LdGP of two notches to 'AAA'.
In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be
vulnerable to downgrade if (i) the IDR was downgraded by one or more notches to
'A-' or lower; (ii) the D-Cap fell by one or more categories to 2 (high risk) or
lower; or (iii) the OC that Fitch takes into account in its analysis decreased
below Fitch's 'AAA' breakeven OC level. The Stable Outlook on CFB's IDR drives
the Stable Outlook on the covered bonds.
The increased breakeven OC level is due to increased losses of the portfolio
under Fitch's updated criteria. The loss rate in a 'AAA' stress scenario for the
total collateral pool increased to 15% compared to 12% in the previous analysis.
The two key reasons for the increased losses are i) the increased correlation
assumptions between central and regional/local governments in each country and
ii) significantly decreased recovery assumptions for subnational entities should
they default due to a preceding sovereign default. CFB's collateral pool is
adversely affected by these assumption changes with 13% of the total exposure
comprising claims against public entities located in countries rated below
'AAA'. The main drivers for the breakeven OC are credit risk and open FX
positions on the asset side.
As of September 2012 the LdGP amounted to EUR 3.7bn and were secured by a cover
pool of public-sector assets amounting to EUR4.5bn. The cover pool comprised 353
assets, which Fitch assigned to 156 ultimate debtors in its analysis. The
largest regional concentrations were in Germany (27%) and the United States
The Fitch breakeven OC for the covered bond rating will be affected by, amongst
other factors, the profile of the cover assets relative to outstanding covered
bonds, which can change over time, even in the absence of new issuance.
Therefore the breakeven OC to maintain the covered bond rating cannot be assumed
to remain stable over time.
Fitch may have provided another permissible service to CFB or its related third
parties. Details of this service can be found on Fitch's website in the EU
regulatory affairs page.
+49 69 768076 122
Fitch Deutschland GmbH
Jan Seemann, CFA
+49 69 768076 112
Susanne Matern, CFA
+49 69 768076 237
Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232,