(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 the Rating Watch Negative (RWN) following the revision of the Discontinuity Cap (D-Cap) from 4 (moderate risk) to 5 (low risk). A Negative Outlook has been assigned.
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 management assessment to low risk from moderate risk. Previously, this moderate risk assessment has been the single weak link leading to the D-Cap.
The lower risk assessment for cover pool-specific alternative management is driven by the substantially improved data provision from the issuer, which now includes detailed loan by loan information. Fitch has more confidence in an alternative manager's ability to take over cover pool management if the issuer has proven its data management capabilities by providing high quality data. Other strengths supporting the low risk assessment are the nature of the cover pool assets, which are domestic, residential mortgages, the issuer's experience transferring 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 would be vulnerable to downgrade if any of the following occurred: (i) the IDR was downgraded by one or more notches; or (ii) the D-Cap fell by one or more categories to 4 or lower; or (iii) the programme OC went below 11.0%, which is the breakeven level in line with the 'AAA' rating. The Negative Outlook on WBP's IDR 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 upon supports 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-specific alternative management as well as the liquidity gap and the systemic risk and asset segregation component. The latter is in line with all other German covered bond programmes.
Generally Fitch does not assess the liquidity gap and the systemic risk component better than moderate for mortgage programmes, except if a programme is expected to have very low refinancing requirements post issuer default. The rationale for the low assessment for WBP mortgage covered bonds is that the outstanding bonds have relatively small sizes. Consequently, maturity mismatches and 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 lower than Fitch's previous supporting OC of 11.5%, which related to a covered bonds rating of 'AA+' 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 driver of the Fitch breakeven 'AAA' OC is the programme's open interest rate position. As of June 2012, 25% of the liabilities were floating-rate compared to only 1% of the assets. Consequently, in an increasing interest rate scenario the programme is vulnerable to high interest obligations on the floating liabilities that are not protected by natural hedging or registered swaps in the cover pool.
The Fitch breakeven OC for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.
For all of Fitch's Eurozone Crisis commentary go to
(Caryn Trokie, New York Ratings Unit)