London, 21 October 2016 -- Moody's Investors Service has today confirmed the Aa2 rating assigned
to the public sector covered bonds issued by Depfa ACS Bank ("the
issuer"; deposits Baa2; adjusted baseline credit assessment
ba3; counterparty risk (CR) assessment Baa2(cr)). This rating
action concludes the review of the above rating initiated on 14 September,
2016.
RATINGS RATIONALE
Today's rating action is prompted by the upgrade of the issuer's
CR assessment to Baa2(cr) from Baa3(cr) on review for upgrade.
The Aa2 rating assigned to the issuer's covered bonds had been placed
on review for downgrade because of a shortfall in the level of over-collateralisation
(OC). With the upgrade of the CR assessment, as of 30 June
2016, the minimum level of OC consistent with the Aa2 rating is
6.0% and the programme's OC is 7.6%.
For further details on the upgrade of the issuer's CR assessment,
please see "Moody's upgrades DEPFA Bank and DEPFA ACS to Baa2/Prime-2;
changes outlook to stable", published on 19 October 2016 (https://www.moodys.com/viewresearchdoc.aspx?docid=PR_356469).
On 14 October 2016, the issuer announced a transaction expected
to involve the cancellation of €4.0 billion of its covered
bonds and the sale of €4.2 billion of its cover pool assets.
This transaction, and the redemption of certain covered bonds maturing
later in 2016, could reduce currency mismatches in this programme.
Moody's will continue to monitor the impact of any further changes
to the level of OC in the programme and/or its credit and market risks
as the wind-down of the issuer and its parent, Depfa Bank,
accelerates.
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 16.4%.
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 12.4% and collateral risk of 4.0%.
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 8.1%. The over-collateralisation
(OC) in the cover pool is 7.6%, and the issuer provides
5.0% OC in a "committed" form. The minimum
OC level consistent with the Aa2 rating is 6.0%, of
which the issuer should provide 0.5% in a "committed"
form. These numbers, which are in nominal value terms and
calculated using exchange rates as of 30 June 2016 rather than the exchange
rates under the cover pool's currency swaps, 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 provided by the issuer as of 30 June 2016).
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 the issuer's public sector covered bonds, Moody's has
assigned a TPI of "Probable-High".
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-High",
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 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.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's Approach
to Rating Covered Bonds" published in August 2015. Please see the
Rating Methodologies 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
John Hogan
Asst Vice President - 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
