London, 09 September 2015 -- Moody's Investors Service has changed the ongoing rating review to review
with direction uncertain from review for downgrade for the Aa3 rating
on the covered bonds issued by Kommunalkredit Austria AG (the issuer;
deposits Ba3 on review direction uncertain, adjusted baseline credit
assessment b3 on review direction uncertain, Counterparty Risk (CR)
Assessment Ba2 (cr) on review direction uncertain). The review
for downgrade was initiated on 23 June 2014 and extended as the issuer
announced that its owner, Finanzmarktbeteiligung Aktiengesellschaft
des Bundes (FIMBAG), signed a share purchase agreement with a buyer
consortium leading to a proportionate demerger according to the Austrian
Demerger Act (Spaltungsgesetz).
RATINGS RATIONALE
The review with direction uncertain reflects upside and downside risks
to the current Aa3 rating level. On 28 August 2015, the issuer
published its interim report and stated that all contracts regarding the
demerger process have been signed and approved by the shareholders of
Kommunalkredit Austria AG and KA Finanz AG at an extraordinary shareholder
meeting on 27 July 2015. However, the regulatory approvals
are still outstanding.
The partial sale of Kommunalkredit Austria has uncertain implications
for creditors. The issuer's standalone credit profile is characterised
by highly concentrated exposures, the growing short-term
orientation of its funding profile and improving regulatory capital ratios,
despite high leverage. The issuer's long-term debt and deposit
ratings, as well as the bank's baseline credit assessment,
Counterparty Risk Assessment and subordinated debt are under review with
direction uncertain, reflecting (1) the lack of visibility as to
the impact on the bank's standalone profile of the planned, but
yet to be fully substantiated, asset and liability split; and
(2) the need to re-assess government support for the future obligors
of debt issued by Kommunalkredit Austria or its successor entities.
For further information, see "Credit Opinion: Kommunalkredit
Austria AG", published on 14 August 2015.
Covered bond investors are exposed to additional uncertainty as the issuer
announced its intention to split its covered bond programme with issuances
totalling EUR3.8 billion. As part of the issuer's
demerger process, the issuer intends to transfer assets and covered
bonds; about EUR2.7 billion of covered bonds are intended
to be transferred to KA Finanz AG; there is also some uncertainty
on the selection criteria that will be applied for the asset and covered
bond split between the two entities. Further, the demerger
gives the issuer the option to terminate with a notice period of three
months a contract that commits it currently to hold 28% minimum
over-collateralisation. For further information, see
"Demerger of Kommunalkredit Allows Lower Over-Collateralisation
of Covered Bonds, a Credit Negative", published on 19
March 2015.
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 probability that the
issuer will cease making payments under the covered bonds (a CB anchor
event); and (2) the stressed losses on the cover pool assets following
a CB anchor event.
The CB anchor for this programme is CR assessment plus 1 notch.
The CR assessment reflects an issuer's ability to avoid defaulting
on certain senior bank operating obligations and contractual commitments,
including covered bonds. Moody's may use a CB anchor of CR
assessment plus one notch in the European Union or otherwise where an
operational resolution regime is particularly likely to ensure continuity
of covered bond payments.
The cover pool losses for this programme are 28.3%.
This is an estimate of the losses Moody's currently models following a
CB anchor event. Moody's splits cover pool losses between
market risk of 19.9% and collateral risk of 8.5%.
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 cover pool assets' credit quality. Moody's
derives collateral risk from the collateral score, which for this
programme is currently 17.0%.
The over-collateralisation in the cover pool is 33.5%,
of which the issuer provides 28.0% on a "committed"
basis. The minimum OC level consistent with the Aa3 on review direction
uncertain rating target is 28.5%, of which the issuer
should provide 21.5% in a "committed" form (numbers
in nominal value terms). These numbers show that Moody's
is relying on to a minor degree 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 30. June 2015). 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 Global Covered Bonds Monitoring Overview",
published quarterly.
TPI FRAMEWORK: Moody's assigns a "timely payment indicator"
(TPI), which measures the likelihood of timely payments to covered
bondholders following a CB anchor event. The TPI framework limits
the covered bond rating to a certain number of notches above the CB anchor.
For Kommunalkredit Austria's public sector covered bonds,
Moody's has assigned a TPI of High.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:
The CB anchor is the main determinant of a covered bond programme's rating
robustness. A change in the level of the CB anchor could lead to
an upgrade or downgrade of the covered bonds. The TPI Leeway measures
the number of notches by which Moody's might lower the CB anchor 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 zero notches. This implies that Moody's
might downgrade the covered bonds because of a TPI cap if it lowers the
CB anchor by one notch all other variables being equal. A downgrade
could also occur if the level of over-collateralisation were to
decrease. On the other side, Moody's might upgrade
the covered bonds if the CB anchor were to improve and the over-collateralisation
were to remain at the current level. A multiple-notch downgrade
of the covered bonds might occur in certain circumstances, such
as (1) a country ceiling or sovereign downgrade capping a covered bond
rating or negatively affecting the CB Anchor and the TPI; (2) a multiple-notch
downgrade of the CB Anchor; or (3) a material reduction of the value
of the cover pool, for example because of a reduction in over-collateralisation.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's
Approach to Rating Covered Bonds" published in August 2015.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions of the disclosure form.
Moody's did not use any stress scenario simulations in its analysis.
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.
Alexander Zeidler
VP - Senior Credit Officer
Structured Finance Group
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
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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 changes the ongoing rating review to "Aa3, direction uncertain" for Kommunalkredit Austria's public sector covered bonds
