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Rating Action:

Moody's assigns A2 to NORD/LB's aircraft covered bonds

17 Jul 2012

Frankfurt am Main, July 17, 2012 -- Moody's Investors Service has today assigned a definitive A2 long-term rating to the aircraft covered bonds (Flugzeugpfandbriefe) issued by Norddeutsche Landesbank Girozentrale (NORD/LB, the issuer). The bonds are governed by the German Pfandbrief Act.

RATINGS RATIONALE

A covered bond benefits from (i) the issuer's promise to pay interest and principal on the bonds; and (ii) if the issuer defaults, the economic benefit of a collateral pool (the cover pool). The ratings therefore take into account the following factors:

(i) The credit strength of NORD/LB (rated A3/P-2/D).

(ii) The value of the cover pool, if NORD/LB defaults. The stressed level of losses modelled, if NORD/LB defaults (the cover pool losses) for this transaction is 72.9%.

The covered bonds constitute direct, unconditional and senior obligations of NORD/LB and are secured by a cover pool of 90 aircraft financing assets. As of 30 June 2012, the total outstanding principal amount of the cover pool assets was approximately EUR950 million. The financings comprise direct loans to airlines (41% of the cover pool), aircraft operating leases (51%) and aircraft finance leases (8%). All financing assets are backed by aircraft mortgages. For a detailed description of the cover pool, see Moody's new issue report for this transaction.

Moody's analysis of the value of the cover pool considered:

(i) The legal framework. Notable aspects of the legal framework for Pfandbriefe include, amongst other aspects, the regulatory requirement for the issuer to maintain 2% over-collateralisation on a stressed net-present value basis; Moody's considers this over-collateralisation to be "committed". The framework imposes an LTV threshold of 60%, based on a clearly defined lending value. The issuer must also cover potential liquidity gaps over the next 180 days between payments expected to be received under the cover pool assets and the payments due under the outstanding covered bonds.

(ii) The credit quality of the assets backing the covered bonds. The covered bonds are backed by aircraft financings and the collateral score for the cover pool is 100%.

(iii) The exposure to interest rate and currency risk. Currently, about 15% of the assets are euro-denominated, whilst the issued covered bonds are all euro-denominated. In addition, there is an element of interest-rate risk the programme, because the covered bonds pay a fixed rate, whilst the majority of assets pay a floating rate.

Moody's considers that the transaction is linked to NORD/LB's credit strength, particularly from a default probability perspective. The uplift for the covered bond ratings is restricted to one notch above the issuer rating, given (i) the high level of losses that Moody's expects will impact covered bondholders if NORD/LB defaults; and (ii) the limited amount of relevant historical data available to study collateral losses of aircraft financings.

The TPI assigned to this transaction is "Improbable".

The rating assigned by Moody's addresses the expected loss posed to investors. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

KEY RATING ASSUMPTIONS / FACTORS

Covered bond ratings are determined after applying a two-step process: an expected loss analysis and a TPI framework analysis.

EXPECTED LOSS: Moody's determines a rating based on the expected loss on the bond. The primary model used is Moody's Covered Bond Model (COBOL), which determines expected loss as (i) a function of the issuer's probability of default (measured by the issuer's rating); and (ii) the stressed losses on the cover pool assets following issuer default.

The cover pool losses for this programme are 72.9%. This is based on Moody's most recent modelling (based on data as of 30 April 2012) and is an estimate of the losses Moody's currently models if NORD/LB defaults. Cover pool losses can be split between market risk of 5.9% and collateral risk of 67.0%. Market risk measures losses as a result of refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks). Collateral risk measures losses resulting directly from the credit quality of the assets in the cover pool. Collateral risk is derived from the collateral score.

Moody's uses a collateral score of 100% for this covered bond programme. The collateral score is Moody's opinion of how much credit enhancement is needed to protect against the credit deterioration of assets in the cover pool in order to reach a theoretical Aaa expected loss, assuming those assets are otherwise unsupported. The collateral score setting is due to the historical evidence that aircraft market values are exposed to more frequent and higher volatility than conventional Pfandbrief collateral (such as residential mortgages), and that the volatility is triggered by a wide range of factors. In addition, there is a limited amount of relevant historical data available to study collateral losses of aircraft financings, especially following issuer default. At this stage, the lack of historical data prevents Moody's from determining how much credit enhancement is needed to protect against the credit deterioration of assets in a cover pool in order to reach a theoretical Aaa expected loss.

However, in Moody´s view, some limited value can be given to the cover pool's credit quality. The aircraft covered bonds thus benefit from one notch of uplift over the issuer rating, as a result of (i) the strength of the German legal framework for Flugzeugpfandbriefe (aircraft covered bonds); and (ii) the role of the issuer in the programme. The strengths of the legal framework include a 60% LTV threshold based on the aircraft lending value. The Flugzeugpfandbriefe framework regulates the calculation of this lending value, the concept of which Moody's believes will likely soften the credit-risk impact of the volatility of the aircraft market. Furthermore, Moody's expects that NORD/LB will actively manage cover pool and replace defaulted assets (see Moody's pre sale report for further information on the Flugzeugpfandbriefe framework).

The current over-collateralisation in the cover pool is 91%, of which 2% is provided on a "committed" basis. The minimum over-collateralisation level that is consistent with the A2 rating target is 0% (numbers in present value terms). Therefore, Moody's is not relying on "uncommitted" over- collateralisation in its expected loss analysis.

All numbers in this section are based on Moody's most recent modelling (based on data, as per 30 April 2012).

TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI), which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI framework is to limit the covered bond rating to a certain number of notches above the issuer's rating. The TPI Leeway measures the number of notches by which the issuer's rating may be downgraded before the covered bonds are downgraded under the TPI framework.

SENSITIVITY ANALYSIS

The robustness of a covered bond rating largely depends on the issuers' credit strength. Based on the current TPI of "Improbable", the TPI Leeway for this programme is three notches, meaning the covered bonds might be downgraded as a result of a TPI cap once the issuer rating is downgraded below Baa3, all other variables being equal.

However, as outlined above, the covered bond ratings should be expected to be restricted to one notch above the issuer rating as a result of the expected loss analysis.

A multi-notch downgrade of the covered bonds might occur in certain limited circumstances, such as (i) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (ii) a multi-notch downgrade of the issuer; or (iii) a material reduction of the value of the cover pool.

As the euro area crisis continues, the ratings of covered bonds remain exposed to the uncertainties of credit conditions in the general economy. The deteriorating creditworthiness of euro area sovereigns as well as the weakening credit profile of the global banking sector could negatively impact the ratings of covered bonds. For more information please refer to the Rating Implementation Guidance published on 13 February 2012 "How Sovereign Credit Quality May Affect Other Ratings". Furthermore, as discussed in Moody's special report "Rating Euro Area Governments Through Extraordinary Times -- An Updated Summary," published in October 2011, Moody's is considering reintroducing individual country ceilings for some or all euro area members, which could affect further the maximum structured finance rating achievable in those countries. Moody's is also continuing to consider the impact of the deterioration of sovereigns' financial condition and the resultant asset portfolio deterioration in covered bond transactions.

RATING METHODOLOGY

The principal methodology used in this rating was "Moody's Approach to Rating Covered Bonds" published in March 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Martin Lenhard
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns A2 to NORD/LB's aircraft covered bonds
No Related Data.
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