London, 08 September 2014 -- Moody's Investors Service has downgraded to Aa1 from Aaa the ratings on
the mortgage covered bonds issued by Erste Group Bank AG (deposits Baa2
negative, bank financial strength rating D+/adjusted baseline
credit assessment ba1), which the Austrian Mortgage Bank Act (Hypothekenbankengesetz)
governs. In addition, Moody's has placed on review
for downgrade the ratings on Erste Bank Group's mortgage covered
bonds and public-sector covered bonds because the current rating
levels can only be maintained if the issuer decides to provide contractually
committed over-collateralisation (OC) above the statutory minimum
level. Today's rating action follows the downgrade of the
issuer ratings to Baa2 from Baa1 on 5 September 2014.
RATINGS RATIONALE
The downgrade of Erste Group Bank's mortgage covered bond ratings,
as well as the review for downgrade of the mortgage covered bond ratings
and the public-sector covered bond ratings, follow the downgrade
of Erste Group Bank's long-term debt rating to Baa2 from
Baa1 on 5 September 2014.
As a result of this downgrade, the timely payment indicator (TPI)
framework now caps the ratings on the mortgage covered bonds at Aa1.
In addition, the issuer will need to provide committed OC of 13%
in order to maintain the Aa1 ratings on the mortgage covered bonds and
a committed OC of 21% in order to maintain the Aaa ratings on the
public-sector covered bonds. For the mortgage covered bonds,
the total level of OC consistent with the current rating is 19%
(all OC levels provided are in present-value terms). The
highest ratings achievable without contractual OC commitment are Aa2 for
the public-sector covered bonds and Aa3 for the mortgage covered
bonds.
Moody's has assigned a TPI of "Probable" to the mortgage covered
bond programme and a TPI of "High" to the public-sector covered
bond programme.
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 both programmes is the senior unsecured rating plus
one notch given that the debt ratio is between 5% and 10%,
and the uplift of the issuer's senior unsecured rating over the
adjusted BCA is two notches.
Moody's currently models cover pool losses for Erste Group Bank's
mortgage covered bonds at 25.3% following a CB anchor event.
Moody's splits cover pool losses between market risk of 18.6%
and collateral risk of 6.7%. 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 is currently 10.1% for this
programme.
Moody's currently models cover pool losses for Erste Group Bank's
public-sector covered bonds at 15.8% following a
CB anchor event. Moody's splits cover pool losses between
market risk of 13.1% and collateral risk of 2.7%.
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 is currently
4.9% for this programme.
The OC in the mortgage cover pool is 31.8%, of which
Erste Group Bank AG provides 0% on a "committed" basis.
The minimum OC level consistent with the Aa1 rating target is 19%,
of which the issuer should provide 13% in a "committed"
form.
The OC in the public-sector cover pool is 24.6%,
of which Erste Group Bank AG provides 0% on a "committed"
basis. The minimum OC level consistent with the Aaa rating target
is 21%, of which the issuer should provide 21% in
a "committed" form. All OC level numbers are indicated
in present-value terms.
All numbers in this section are based on the most recent Performance Overview/Moody's
most recent modelling, which used data as of 31 March 2014.
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 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.
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
downgrading the covered bonds because of TPI framework constraints.
Based on the current TPI of "Probable", the TPI Leeway
for the mortgage programme is 0 notches, implying that Moody's
might downgrade the mortgage covered bonds because of a TPI cap,
if it lowers the CB anchor by one notch, all other variables being
equal.
Based on the current TPI of "High", the TPI Leeway for
the public sector programme is 0 notches, implying that Moody's
might downgrade the public-sector covered bonds because of a TPI
cap, if it lowers the CB anchor by one notch, 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 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.
Martin Rast
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 downgrades Erste Group Bank's mortgage covered bonds to Aa1, reviews mortgage and public-sector covered bonds for downgrade