March 24, 2014 / 4:32 PM / in 4 years

Fitch Affirms UBS AG's Mortgage Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, March 24 (Fitch) Fitch Ratings has affirmed UBS AG's (UBS, A/Stable/F1) outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. KEY RATING DRIVERS The rating is based on UBS's Long-Term Issuer Default Rating (IDR) of 'A', a Discontinuity Cap (D-Cap) of 3 (moderate high) and an asset percentage (AP) of 87.0%, which is equivalent to Fitch's breakeven AP for a 'AAA' rating. All these factors support a 'AA' rating on a probability of default (PD) basis and a 'AAA' rating after giving credit for recoveries. The main drivers of the AP are estimated credit losses and sale of assets from the cover pool, potentially in a stressed market environment and for a depressed price. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 24.9% and a weighted average recovery rate of 84.1%, resulting in a weighted average credit loss of 4.0%. Sale of assets is driven by maturity mismatches between the programme's asset and liability profile. Maturity mismatches are significant with the weighted average term of the assets modelled by Fitch at 10.9 years and of the liabilities at 3.3 years. The cover pool's actual WA asset maturity is approximately 3.7 years. In Fitch's view the actual remaining term of the loans do not adequately address the risk of extension of the fairly short-term bullet loans beyond the remaining term in a stressed economic environment. Fitch has therefore formed assumptions about the maturity profile of the cover pool's assets to better reflect potential mismatches between the cover pool and the covered bond issues in a wind-down scenario arising from possible extensions of the loans. As of 31 December 2013, the outstanding mortgage covered bonds of CHF15.2bn were backed by a cover pool with an aggregate outstanding balance of CHF22.1bn of Swiss residential mortgage loan contracts secured on 51,500 Swiss properties. RATING SENSITVITIES UBS covered bonds' rating would be vulnerable to a downgrade if any of the following occurs: (i) the IDR is downgraded by one or more notches to 'A-' or below; or (ii) the D-Cap falls by one or more categories to 2 (high risk) or lower; or (iii) the AP that Fitch considers in its analysis increases above the agency's 'AAA' breakeven level of 87.0%. Fitch is in the process of implementing its recently updated covered bond criteria to reflect the beneficial position for covered bonds under bank resolution frameworks where covered bonds are exempted from bail-in. The course of implementation will take place as described in Feedback Report: Covered Bond Rating Criteria Change - Developments in Bank Resolution Frameworks Beneficial. Contact: Primary Analyst Kai-Uwe Richter, CFA, FRM Associate Director +49 69 768076 131 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analyst Mathias Pleissner Director +49 69 768076 133 Committee Chairperson Rebecca Holter Senior Director +49 69 768076 261 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available at Applicable criteria: 'Covered Bonds Rating Criteria', dated 10 March 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds' dated 13 May 2013, EMEA RMBS Master Rating Criteria', dated 6 June 2013 and 'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum', dated 04 February 2014 are available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here EMEA RMBS Master Rating Criteria here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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