London, 01 March 2011 -- Moody's Investors Service has today assigned a definitive long-term
rating of Aaa to the mortgage covered bonds (Hypothekenpfandbriefe or
covered bonds) issued by Eurohypo AG (the issuer or Eurohypo), which
are governed by the German Pfandbrief Act.
RATINGS RATIONALE
A covered bond benefits from (i) a promise to pay by the issuer;
and (ii) in the event of default of the bank supporting the covered bonds,
the economic benefit from a pool of collateral (the cover pool).
The ratings of the covered bonds take into account the following factors:
1. The credit strength of the issuer (rated A3/ Prime-1).
2. The credit quality of the assets securing the payment obligations
of the issuer under the covered bonds. As of 31 December 2010,
the assets in Eurohypo's cover pool amounted to €50.9 billion.
The vast majority of the cover assets are commercial and residential mortgage
loans.
3. The strength of the German legal framework. There are
a number of strengths in the German Pfandbrief legislation, these
include inter alia the regulatory requirement for the issuer to maintain
a minimum of 2% over-collateralisation on a stressed present
value basis. 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.
4. The total level of over-collateralisation currently in
the cover pool is 32.4% on a present value basis (as of
31 December 2010). According to Moody's EL modelling based on 30
September 2010 data, the minimum over-collateralisation level
on a nominal and present value basis that is consistent with the Aaa rating
target is 14.5%.
For Eurohypo's mortgage covered bonds, Moody's has assigned a TPI
of "Probable-High".
The Aaa rating assigned to the existing covered bonds is expected to be
assigned to all subsequent covered bonds issued by the issuer under this
programme and any future rating actions are expected to affect all such
covered bonds. Should there be any exceptions to this, Moody's
will in each case publish details in a separate press release.
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:
expected loss analysis and 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 a function of the issuer's
probability of default, measured by the issuer's rating of A3,
and the stressed losses on the cover pool assets following issuer default.
In Moody's EL modelling, based on data as per 30 September 2010,
the Cover Pool Losses for this programme are 17.7%.
This is an estimate of the losses Moody's currently models in the event
of issuer default. Cover Pool Losses can be split between Market
Risk of 9.9% and Collateral Risk of 7.8%.
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 which for this programme
is currently 10.6%.
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.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the credit
strength of the issuer.
The number of notches by which the issuer's rating may be downgraded before
the covered bonds are downgraded under the TPI framework is measured by
the TPI Leeway. Based on the current TPI of "Probable-High"
the TPI Leeway for this programme is 0 notches, meaning the issuer
rating would need to be downgraded to Baa1 before the covered bonds are
downgraded, all other things being equal.
A multiple notch downgrade of the covered bonds might occur in certain
limited circumstances. Some examples might be (a) a sovereign downgrade
negatively affecting both the issuer's senior unsecured rating and the
TPI; (b) a multiple notch downgrade of the issuer; or (c) a
material reduction of the value of the cover pool.
For further details on Cover Pool Losses, Collateral Risk,
Market Risk, Collateral Score and TPI Leeway across all covered
bond programmes rated by Moody's please refer to "Moody's EMEA Covered
Bonds Monitoring Overview", published quarterly. These figures
are based on the reporting by the issuer and are subject to change over
time.
The principal methodology used in rating these covered bonds are "Moody's
Rating Approach to European Covered Bonds", published in March 2010.
REGULATORY DISCLOSURES
Information sources used to prepare the credit 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 Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Madrid
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Martin Rast
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns Aaa rating to Eurohypo's mortgage covered bonds
