London, 24 September 2015 -- Moody's Investors Service has downgraded to Aa1 from Aaa the rating on
the public-sector covered bonds issued by Hypo NOE Gruppe Bank
AG (HYPO NOE, not publicly rated). At the same time,
the rating agency confirmed the Aa1 rating on HYPOE NOE's mortgage
covered bonds. This rating action concludes the review of both
ratings.
RATINGS RATIONALE
The ratings of the covered bonds have been on review since 10 March 2015
pending the implementation of committed over-collateralisation
(OC). The issuer has in the meantime implemented agreements that
provide sufficient OC in an amount and in the right form to maintain the
Aa1 ratings.
The issuer has entered into separate agreements to establish committed
OC for both the mortgage and public-sector covered bonds.
Both agreements dynamically track the level of committed OC required to
maintain the Aa1 ratings, but the level of committed OC would not
exceed 20% for the mortgage and 12.0% for the public-sector
covered bonds.
As a result, Moody's has confirmed the Aa1 ratings on the
mortgage covered bonds because the issuer provides sufficient OC in an
amount and in the right form to maintain the Aa1 ratings.
The rating agency has downgraded the rating on the public-sector
covered bonds to Aa1 from Aaa. The level of committed OC is not
sufficient to support the Aaa rating, but can support a Aa1 rating.
KEY RATING ASSUMPTIONS/FACTORS
Moody's determines covered bond ratings using a two-step
process: an expected loss analysis and a Timely Payment Indicator
(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.
For each of the programmes below, the cover pool losses are an estimate
of the losses Moody's currently models following a CB anchor event.
Moody's splits cover pool losses between market risk and collateral risk.
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 the cover pool assets' credit quality.
Moody's derives collateral risk from the collateral score. 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.
The CB anchor for Hypo NOE is the Counterparty Risk (CR) Assessment plus
one 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.
-- Mortgage Covered Bonds --
The cover pool losses of Hypo NOE's mortgage covered bonds are 26.2%,
with market risk of 18.2% and collateral risk of 8.0%.
The programme's collateral score is 12%. The cover pool's
OC is 141.2%, of which the issuer provides 14.0%
on a "committed" basis. The minimum OC level that is consistent
with a Aa1 rating is 21.5%, of which the issuer should
provide 14.0% in a "committed" form. These numbers
show that Moody's is relying on "uncommitted" OC in its expected loss
analysis.
With the exception of the committed OC, the numbers in this section
are based on the most recent Performance Overview (based on data,
as of 30 June 2015).
-- Public-Sector Covered Bonds --
The cover pool losses of Hypo NOE's public-sector covered bonds
are 27.0%, with market risk of 12.2%
and collateral risk of 12.7%. The programme's collateral
score is 25.5%. The cover pool's OC is 34.0%,
of which the issuer provides 7.5% on a "committed" basis.
The minimum OC level that is consistent with a Aa1 rating is 25.0%,
of which the issuer should provide 7.5% in a "committed"
form (numbers in present value terms). These numbers show that
Moody's is relying on "uncommitted" OC in its expected loss analysis of
the public-sector covered bonds.
The numbers in this section are based on Moody's most recent modelling
(based on data, as of 30 June 2015).
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.
Moody's has assigned a TPI of Probable to the mortgage covered bonds,
and a TPI of high to the public-sector covered bonds.
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
covered bonds is zero notches. This implies that Moody's
might downgrade the covered bonds because of a TPI cap if it lowers the
CB anchor all other variables being equal.
Based on the current TPI of High, the TPI Leeway for the public-sector
covered bonds is one notch. This implies that Moody's might
downgrade the covered bonds because of a TPI cap if it lowers the CB anchor
by two 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 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 Hypo NOE's public-sector covered bonds to Aa1 and confirms the Aa1 of its mortgage covered bonds
