(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has affirmed Wuestenrot Bank AG Pfandbriefbank's(WBP, 'BBB+'/Negative/'F2') mortgage covered bonds at 'AAA' and removed theRating Watch Negative (RWN) following the revision of the Discontinuity Cap(D-Cap) from 4 (moderate risk) to 5 (low risk). A Negative Outlook has beenassigned.
The rating is based on WBP's Long-term Issuer Default Rating (IDR) of 'BBB+',the updated D-Cap of 5 (low risk) and the overcollateralization (OC) of 12.3%that Fitch takes into account in its analysis.
The D-Cap assessment has been revised to 5 (low risk) from 4 (moderate risk),following the revision of the cover-pool specific alternative managementassessment to low risk from moderate risk. Previously, this moderate riskassessment has been the single weak link leading to the D-Cap.
The lower risk assessment for cover pool-specific alternative management isdriven by the substantially improved data provision from the issuer, which nowincludes detailed loan by loan information. Fitch has more confidence in analternative manager's ability to take over cover pool management if the issuerhas proven its data management capabilities by providing high quality data.Other strengths supporting the low risk assessment are the nature of the coverpool assets, which are domestic, residential mortgages, the issuer's experiencetransferring loans to third parties and its use of market-based IT systems.
In terms of the sensitivity of the covered bonds' rating, the 'AAA' rating wouldbe vulnerable to downgrade if any of the following occurred: (i) the IDR wasdowngraded by one or more notches; or (ii) the D-Cap fell by one or morecategories to 4 or lower; or (iii) the programme OC went below 11.0%, which isthe breakeven level in line with the 'AAA' rating. The Negative Outlook on WBP'sIDR drives the Negative Outlook for the covered bonds.
The agency takes into account the lowest OC of the past year in its analysis,reflecting the issuer's 'F2' Short-term IDR. The level of OC Fitch relies uponsupports an 'AA' rating on a probability of default (PD) basis and an 'AAA'rating considering recoveries given default.
The D-Cap is driven through the low risk assessment of the cover pool-specificalternative management as well as the liquidity gap and the systemic risk andasset segregation component. The latter is in line with all other German coveredbond programmes.
Generally Fitch does not assess the liquidity gap and the systemic riskcomponent better than moderate for mortgage programmes, except if a programme isexpected to have very low refinancing requirements post issuer default. Therationale for the low assessment for WBP mortgage covered bonds is that theoutstanding bonds have relatively small sizes. Consequently, maturity mismatchesand the amount to be sold in a stressed scenario are limited.
The Fitch breakeven 'AAA' OC level of 11.0% for the covered bond rating is lowerthan Fitch's previous supporting OC of 11.5%, which related to a covered bondsrating of 'AA+' on a PD basis. Following the publication of its revised coveredbonds rating criteria, the agency now communicates the breakeven OC to maintainthe covered bonds rating rather than to maintain the current rating on a PDbasis plus recovery uplift.
The main driver of the Fitch breakeven 'AAA' OC is the programme's open interestrate position. As of June 2012, 25% of the liabilities were floating-ratecompared to only 1% of the assets. Consequently, in an increasing interest ratescenario the programme is vulnerable to high interest obligations on thefloating liabilities that are not protected by natural hedging or registeredswaps in the cover pool.
The Fitch breakeven OC for the covered bond rating will be affected, amongothers, by the profile of the cover assets relative to outstanding coveredbonds, which can change over time, even in the absence of new issuances.Therefore it cannot be assumed to remain stable over time.
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(Caryn Trokie, New York Ratings Unit)