(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has downgraded SNS Bank N.V.'s (SNS, 'BBB+'/Stable/'F2') outstanding EUR4.4bn mortgage covered bonds to 'AA+'/Stable from 'AAA'/Rating Watch Negative (RWN).
The downgrade follows a one month period in which Fitch assigned RWN to all programmes for which its analysis no longer supported the current rating, following the implementation of the updated Covered Bonds Rating Criteria (see "Fitch Puts 2 Dutch Covered Bonds on RWN; Assigns Dutch & Irish Programmes D-Caps & Outlooks" dated 12 September 2012 at ). The one month period was established to allow issuers to respond to the updated assessment and propose changes to the programme, if appropriate. SNS did not propose any changes to the programme that would address the drivers of the downgrade.
Under the updated criteria, a Discontinuity Cap (D-Cap) of 4 applies to this programme, which when combined with the issuer's Long-term Issuer Default Rating (IDR) of 'BBB+', limits the maximum achievable rating on the programme to 'AA+', taking into account a two notch uplift for recoveries.
The 'AA+' rating would be vulnerable to a further downgrade if any of the following occurred: (i) the IDR was downgraded by one notch or more to 'BBB' or lower; or (ii) the D-Cap fell by at least one category to 3 (moderate high risk) or lower; or (iii) the asset percentage (AP) that Fitch considers in its analysis increased above Fitch's 'AA+' breakeven AP of 78.0%. The Stable Outlook on SNS's IDR drives the Stable Outlook for the covered bonds.
The agency takes into account the highest AP of the past year of 68.6% in its analysis, reflecting the issuer's Short-term IDR of 'F2'. The level of AP Fitch relies upon supports a 'AA-' rating on a probability of default (PD) basis and supports a 'AA+' rating considering recoveries given default.
The D-Cap of 4 is driven by the moderate risk assessment of asset segregation, liquidity gap & systemic risk and cover pool specific alternative management risk, which are the weakest of the D-Cap components. The systemic alternative management and the privileged derivatives components are assessed as low risk from a discontinuity point of view.
The moderate risk liquidity gap assessment reflects the agency's view of the mitigants in the form of a three-month interest reserve fund and a 12-month extendible maturity on the covered bonds. The asset segregation is driven by the assessment that possible future set-off claims are unlikely, but cannot be completely disregarded under Dutch law. Finally, the cover pool specific alternative management assessment is driven by Fitch's favourable view of the data delivery and the adequacy of the internally-developed IT systems in place. However, Fitch expects internally developed IT systems will lead to a more difficult transition to an alternative manager than market-based systems.
The Fitch breakeven 'AA+' AP level of 78.0% for the covered bond rating is slightly lower than Fitch's previous supporting AP of 79.0%, which related to a covered bonds rating of 'AA' on a PD basis plus two notches recovery uplift. Although a lower rating applies, updated mortgage assumptions for the Dutch mortgage market, most notably a more punitive low CPR stress, have led to a lower 'AA+' breakeven AP. The breakeven AP is driven mainly by the cost of bridging high maturity mismatches by the stressed sale of the cover pool assets and by the credit losses on the assets in a stressed environment. The weighted average life (WAL) of the assets is 23 years, the WAL of the outstanding covered bonds is five years and the expected loss on the cover pool is 6.6% in a 'AA+' scenario.
The Fitch breakeven AP 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.
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(Caryn Trokie, New York Ratings Unit)