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Rating Action:

Moody's assigns Aa1 rating to Commerzbank's mortgage covered bonds

Global Credit Research - 17 Oct 2013

Frankfurt am Main, October 17, 2013 -- Moody's Investors Service has today assigned a definitive long-term rating of Aa1 to the mortgage covered bonds ("Hypothekenpfandbriefe") issued by Commerzbank AG (deposits Baa1, stable; bank financial strength rating (BFSR) D+/baseline credit assessment (BCA) ba1, stable).

RATINGS RATIONALE

A covered bond benefits from (1) the issuer's promise to pay interest and principal on the bonds; and (2) the economic benefit of a collateral pool (the cover pool) in the event of issuer default. The ratings therefore reflect the following factors:

(1) The credit strength of Commerzbank.

(2) The value of the cover pool, if the issuer defaults. The stressed level of losses modelled in the event of issuer default (cover pool losses) for this transaction is 15.4%.

Moody's considered the following factors in its analysis of the cover pool's value:

a) The credit quality of the assets backing the covered bonds. All loans in the cover pool are residential mortgage loans granted to borrowers in Germany. The collateral score for the cover pool is 5.0%.

b) The legal framework of the programme. Notable aspects of the legal framework for covered bonds ("Pfandbriefe") include inter alia the legal requirement for the issuer to maintain 2% over-collateralisation on a stressed present value basis. The framework imposes a loan-to-value (LTV) threshold of 60% based on a clearly defined lending value. The issuer is also required to 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.

c) The exposure to market risk, which is 12.0% for this cover pool.

d) As per 11 October 2013, the over-collateralisation (OC) in the cover pool was about 70% (based on present value), of which Commerzbank provides 2% on a "committed" basis (see Key Rating Assumptions/Factors, below).

The timely payment indicator (TPI) assigned to this transaction is "high". Moody's TPI framework does not constrain the rating.

As of 31 August 2013, the total nominal value of the assets included in the cover pool, comprising 2,848 residential mortgage loans, is approximately EUR781 million. The residential mortgage loans have a weighted-average seasoning of 22 months and a weighted-average LTV ratio of 71.9%.

The Credit Ratings of the covered bonds were assigned in line with Moody's existing Credit Rating Methodology entitled "Moody's Approach to Rating Covered Bonds", dated July 2012. Moody's notes that on 19 September 2013 it published a Request for Comment (RFC). In the RFC, the rating agency proposes an adjustment to the anchor point it uses in its covered bond analysis. If the revised Credit Rating Methodology is implemented as proposed, the Credit Ratings of the covered bonds may be affected. Please refer to Moody's Request for Comment, titled "Approach to Determining the Issuer Anchor Point for Covered Bonds" for further details regarding the implications of the proposed Credit Rating Methodology changes on Moody's Credit Ratings https://www.moodys.com/research/Approach-to-Determining-the-Issuer-Anchor-Point-for-Covered-Bonds--PBS_SF342448.

The rating that Moody's has assigned addresses the expected loss posed to investors. Moody's ratings address only the credit risks associated with the transaction. Moody's did not address other non-credit risks, but these may have a significant effect on yield to investors.

KEY RATING ASSUMPTIONS/FACTORS

Moody's determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis.

EXPECTED LOSS: Moody's uses its Covered Bond Model (COBOL) to determine a rating based on the expected loss on the bond. COBOL determines expected loss as (1) a function of the issuer's probability of default (measured by the issuer's rating); and (2) the stressed losses on the cover pool assets following issuer default.

The cover pool losses for this programme are 15.4%: this is an estimate of the losses Moody's currently models if Commerzbank defaults. Moody's splits cover pool losses between market risk of 12.0% and collateral risk of 3.4%. Market risk measures losses stemming from 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 cover pool assets. Moody's derives collateral risk from the collateral score, which for this programme is currently 5.0%.

As per 11 October 2013, the OC in the cover pool was about 70%, of which Commerzbank provides 2% on a "committed" basis. The minimum OC level consistent with the Aa1 rating target is 9.5%, of which the issuer should provide 0% in a "committed" form (numbers in present value terms). These numbers show that Moody's is relying on "uncommitted" OC in its expected loss analysis. All numbers in this section are based on Moody's most recent modelling (based on data as per 31 August 2013)

For further details on cover pool losses, collateral risk, market risk, collateral score and TPI Leeway across covered bond programmes rated by Moody's, please refer to "Moody's EMEA Covered Bonds Monitoring Overview", published quarterly.

TPI FRAMEWORK: Moody's assigns a TPI, which indicates the likelihood that the issuer will make timely payments to covered bondholders if the issuer defaults. The TPI framework limits the covered bond rating to a certain number of notches above the issuer's rating.

For Commerzbank's mortgage covered bonds, Moody's has assigned a TPI of "high".

SENSITIVITY ANALYSIS

The issuer's credit strength is the main determinant of a covered bond rating's robustness. The TPI Leeway measures the number of notches by which Moody's might downgrade the issuer's rating before the rating agency downgrades the covered bonds because of TPI framework constraints.

Based on the current TPI of "high", the TPI Leeway for this programme is one notch. This implies that Moody's might downgrade the covered bonds because of a TPI cap, if it downgrades the issuer rating below Baa2, all other variables being equal.

A multiple-notch downgrade of the covered bonds might occur in certain limited circumstances, such as: (1) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (2) a multiple-notch downgrade of the issuer; or (3) a material reduction of the value of the cover pool.

RATING METHODOLOGY

The principal methodology used in this rating was Moody's Approach to Rating Covered Bonds published in July 2012. 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 certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit 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 Aa1 rating to Commerzbank's mortgage covered bonds
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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