London, 24 October 2014 -- Moody's Investors Service has today confirmed the Aa1 ratings assigned
to the mortgage covered bonds issued by Erste Group Bank AG (Erste;
deposits Baa2 negative, standalone bank financial strength rating
D+, adjusted baseline credit assessment ba1). At the
same time Moody's has downgraded to Aa1 from Aaa the ratings of
Erste's public sector covered bonds.
This rating action concludes the review of the bonds, which Moody's
initiated on 8 September 2014.
RATINGS RATIONALE
Moody's rating actions follow Erste's decision to enter into agreements
to maintain 13.0% over-collateralisation (OC) for
its mortgage covered bonds and 3.0% OC for its public-sector
covered bonds in a form that Moody's considers "committed". Erste
has signed this agreement on 22 October 2014. The OC commitment
comes in the form of a contract for the benefit of a third party,
the bondholders. Erste's commitment to maintain OC in committed
form will apply to the existing covered bonds and all newly issued covered
bonds under both covered bond programmes.
Under Moody's rating approach, only limited value is given to collateral
that is not considered "committed". Moody's considers OC to be
"committed" if the issuer's discretion to remove this is sufficiently
restricted.
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 SUR plus one notch given the debt
ratio is between 5 and 10% and the uplift of the issuer's
deposit rating over the adjusted BCA is 2 notches.
The cover pool losses for each programme are an estimate of the losses
Moody's currently models following a CB anchor event. Moody's
splits cover pool losses between market risks and collateral risks.
Market risks measure losses stemming from refinancing risks and risks
related to interest-rate and currency mismatches (these losses
may also include certain legal risks). Collateral risks measure
losses resulting directly from cover pool assets' credit quality.
Moody's derives the collateral risk from the collateral score.
--- MORTGAGE COVERED BONDS
The cover pool losses are 22.9%, with market risk
of 16.3% and collateral risk of 6.6%.
The collateral score is 9.8%. The present value OC
in this cover pool is 25.5%, of which Erste provides
13.0% on a "committed" basis. The minimum
OC level that is consistent with the Aa1 rating target is 17.0%
in present value terms, of which Erste should provide 13.0%
in a "committed" form. These numbers show that Moody's
is relying to some degree on "uncommitted" OC in its expected
loss analysis for the Aa1 rating of the mortgage covered bonds.
--- PUBLIC-SECTOR COVERED BONDS
The cover pool losses are 16.4%, with market risk
of 13.8% and collateral risk of 2.6%.
The collateral score is 5.3%. The present value OC
in this cover pool is 35.3%, of which Erste provides
3.0% on a "committed" basis. The minimum
OC level that is consistent with the Aa1 rating target is 11.5%
in present value terms, of which Erste should provide 3.0%
in a "committed" form. These numbers show that Moody's
is relying to some degree on "uncommitted" OC in its expected
loss analysis for the Aa1 rating of the mortgage covered bonds.
All numbers in this section derive from Moody's most recent modelling,
based on data as per 30 June 2014. 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.
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.
The Timely Payment Indicator (TPI) remains "Probable" for Erste's mortgage
covered bonds and "High" for the public-sector covered bonds.
Factors that would lead to an upgrade or downgrade of the ratings:
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 "Probable" for Erste's mortgage covered
bonds, there is no TPI Leeway for the mortgage programme.
This implies that Moody's might downgrade the covered bonds because
of a TPI cap, if it lowers the CB anchor by 1 notch, all other
variables being equal.
Based on the current TPI of "High" for Erste's public
sector covered bonds, the TPI Leeway for this programme is 1 notch.
This implies that Moody's might downgrade the covered bonds because
of a TPI cap, if it lowers the CB anchor by 2 notches 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 CB anchor and the TPI; (2) a multiple-notch
lowering of the CB anchor; or (3) a material reduction of the value
of the cover pool.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's
Approach to Rating Covered Bonds", published in March 2014.
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
Vice President - Senior Analyst
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 confirms Aa1 ratings assigned to Erste's mortgage covered bonds and downgrades Erste's public sector covered bonds
