(The following statement was released by the rating agency)
Oct 2 - Fitch Ratings has affirmed Bayerische Landesbank's
('A+'/Stable/'F1+') public sector Pfandbriefe at 'AAA'/Stable following a periodic review of the programme.
The ratings are based on Bayerische Landesbank'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 38.6%. When calculating OC, Fitch does not take into account unsecured group-internal exposure to the issuer's affiliate, Banque LBLux. For issuers rated 'F2' or above, Fitch relies on the lowest OC over the last 12 months, which was around 38.6% without the group-internal exposure.
In terms of sensitivity of the Pfandbriefe 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 lower; or (iii) the OC that Fitch considers in its analysis dropped below the agency's 'AAA' breakeven level of 10.5%.
The D-Cap of 5 (low risk) results from a low risk assessment for the asset segregation, the liquidity gap and systemic risk and the cover pool-specific alternative management components. A very low risk assessment was assessed for the 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 10.5% for the covered bond rating is higher than Fitch's previous supporting OC of 7.6%, which related to a covered bonds rating of 'AAA' on a PD basis. The main contributors to the increased 'AAA' breakeven OC are the programmes' asset- and liability mismatches, driven by the longer weighted average (WA) life of the assets (5.8 yrs) when compared to the WA life of the outstanding Pfandbriefe (3.9 yrs). In combination with the increased portion of fixed rate assets in the pool (by 10%-points when compared to last year's analysis) and Fitch's upwards interest rate stresses, Fitch has calculated that a higher portion of the cover pool would have to be sold at a stressed cost to repay the covered bonds on time in a 'AAA' scenario. The increased credit risk of the cover pool (rating default rate of 5.9% and rating loss rate of 1.9% in a 'AAA' stress scenario) as well as the FX risk contributed only a minor portion to the increase in break-even OC.
The previous supporting OC was related to a Pfandbrief 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 Pfandbrief rating, rather than to maintain the current rating on a PD basis plus recovery uplift.
As of 30 June 2012, the cover pool amounted to EUR37.6bn (disregarding the group-internal exposure), and consisted of 130,404 assets, consolidated by Fitch to around 3,890 debtors. The largest obligor represented 10.5% of the outstanding portfolio. The cover pool is concentrated, as the 20 largest guarantor exposures account for 66.2% of the assets and German exposures accounted for 91.6% of the cover pool.
There are currency mismatches due to the USD-, GBP-, CAD-, and CHF-denominated exposures, which arenot mitigated by privileged derivatives, but the open FX positions are fairly limited. The programme has a minor open interest rate position, as around 19.0% of the assets are floating rate compared to 16.9% of the Pfandbriefe.
Fitch has taken all mismatches into account in modelling the expected cash flows by applying certain stress assumptions.
Fitch will monitor the key characteristics of the cover assets and outstanding Pfandbriefe on an on-going basis, and check whether the OC taken into account in its analysis provides protection commensurate with the rating. The Fitch breakeven OC for the Pfandbrief rating will be affected by, amongst other factors, the profile of the cover assets relative to outstanding Pfandbriefe, which can change over time, even in the absence of new issuance. Therefore, the breakeven OC to maintain the Pfandbrief rating cannot be assumed to remain stable over time.
Additional information is available at
. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria: 'Covered Bonds Rating Criteria', dated 10 September 2012 and 'Covered Bonds Counterparty Criteria', dated 25 July 2012, are available at
. Applicable Criteria and Related Research: Covered Bonds Rating Criteria - Amended Covered Bonds Counterparty Criteria (New York Ratings Team)