TEXT-Fitch affirms Landesbank Berlin AG's covered bonds at 'AAA'/stable
(The following statement was released by the rating agency)
Oct 01 - Fitch Ratings has affirmed Landesbank Berlin AG's ('A+'/Stable/'F1+') public sector covered bonds at 'AAA' with a Stable Outlook following a periodic review of the programme.
The ratings are based on Landesbank Berlin AG's Long-term Issuer Default Rating (IDR) of 'A+', the Discontinuity Cap (D-Cap) of 5 (low risk) and the overcollateralisation (OC) that Fitch takes into account in it analysis, which is currently 102.4%.
In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) the IDR was downgraded by four or more notches to 'BBB' or lower; or (ii) the D-Cap fell by four or more categories to 1 (very high risk) or more; or (iii) the OC that Fitch considers in its analysis dropped below Fitch's 'AAA' breakeven level of 9%.
The agency takes into account the lowest OC of the last year in its analysis, reflecting the issuer's 'F1' Short-term IDR. The level of OC Fitch relies upon supports a 'AAA rating on a probability of default (PD) basis.
The D-Cap of 5 (low risk) results from a low risk assessment for asset segregation and the liquidity gap and systemic risk components. A very low risk assessment was assessed for the cover pool-specific alternative management, systemic alternative management and privileged derivatives components. The low risk assessment for asset segregation and the very low risk for systemic alternative management risk component is in line with all German Pfandbriefe programmes (see 'Fitch Assigns German Programmes Outlooks & D-Caps; Puts 3 German Pfandbriefe on RWN', dated 11 September 2012 at ).
The public sector nature of the cover pool primarily supports the low discontinuity risk assessments due to the greater degree of expected liquidity and ease of management of public sector assets compared to mortgage loans. The programme does not have registered derivatives in the cover pool.
The Fitch breakeven 'AAA' OC level of 9% for the covered bond rating is lower than Fitch's previous supporting OC of 15.3%. This is mainly driven by two reasons. The previous supporting OC was driven by asset liability mismatches caused by a benchmark bond. The current asset profile does not include any benchmark issuances which reduces asset liability mismatches. Fitch expects the better match to be sustainable as no further benchmark bonds from the programme are planned. Secondly, the previous supporting OC was related to a covered bonds rating of 'AAA' on a PD basis. Following the publication of its revised covered bonds rating criteria, the agency now communicates the breakeven OC to maintain the covered bonds rating rather than to maintain the current rating on a PD basis plus recovery uplift.
The main contributor to the 'AAA' breakeven OC is the credit risk of the cover pool (rating default rate of 10% and rating loss rate of 8.4% in a 'AAA' stress scenario). The loss rate is driven by low recovery assumptions for unguaranteed exposure to German saving bank associations which accounts for 15.8% of the total cover assets.
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.
As of 30 June 2012, the cover pool amounted to EUR3.6bn and consisted of 433 assets consolidated by Fitch to 77 debtors, with the largest obligor representing 20.6% of the outstanding portfolio. The cover assets are concentrated as the 20 largest guarantor exposures account for 97.5% of the assets. German exposure accounted for 97.6% of the cover pool followed by Austrian (1.4%) and Canadian (Ontario) (1%) exposure.
Asset liability maturity mismatches are limited in this programme with a weighted-average life of the assets and liabilities at 3.5 and 3.0 years, respectively. All assets and all covered bonds are euro-denominated, hence, the covered bonds are not exposed to any currency mismatches. The programme has an open interest rate position, as around 13.2% of the assets are floating rate compared to 20.1% of the Pfandbriefe.
Fitch has taken all mismatches into account in modelling the expected cash flows by applying certain stress assumptions.