Approximately EUR61 billion of notes affected
London, 25 April 2013 -- Moody's Investors Service has today downgraded to Aa3 from Aa2 the ratings
of the mortgage covered bonds (or Hypothekenpfandbriefe) issued by Hypothekenbank
Frankfurt AG (deposits Baa3 stable, bank financial strength rating
E/baseline credit assessment caa2, no outlook assigned) and to Aa2
from Aa1 its public-sector covered bonds (Oeffentliche Pfandbriefe).
RATINGS RATIONALE
The downgrade of the covered bonds follows the downgrade of the issuer
ratings by one notch to Baa3 from Baa2 (see press release "Moody's
downgrades Commerzbank to Baa1 and Hypothekenbank Frankfurt to Baa3;
outlooks stable" dated 23 April 2013).
The Timely Payment Indicator (TPI) remains "High" for both
programmes. This TPI, combined with the Baa3 issuer rating,
caps the ratings assigned to the public-sector covered bonds at
Aa2.
However, Moody's expected loss analysis restricts the ratings
of the mortgage covered bonds, rather than the TPI. With
the committed OC of 2% as required by the German covered bond act,
the maximum achievable rating on the mortgage covered bonds is Aa3.
The ratings assigned by Moody's address the expected loss posed to investors.
Moody's ratings address only the credit risks associated with the transaction.
Other non-credit risks have not been addressed, but may have
a significant effect on yield to investors.
KEY RATING ASSUMPTIONS/FACTORS
Covered bond ratings are determined after applying a two-step process:
an expected loss analysis and a TPI framework analysis.
EXPECTED LOSS: Moody's determines a rating based on the expected
loss on the bond. The primary model used is Moody's Covered
Bond Model (COBOL), which determines expected loss as (1) a function
of the issuer's probability of default (measured by the issuer's
rating); and (2) the stressed losses on the cover pool assets following
issuer default.
The cover pool losses are an estimate of the losses Moody's currently
models if the relevant issuer defaults. Cover pool losses can be
split between market risk and collateral risk. Market risk measures
losses as a result of 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 credit quality
of the assets in the cover pool. Collateral risk is derived from
the collateral score.
--- MORTGAGE COVERED BONDS
The cover pool losses are 18.8%, with market risk
of 10.1% and collateral risk of 8.7%.
The collateral score for this programme is currently 13.0%
and the OC in this cover pool is 14.0%, of which Hypothekenbank
Frankfurt provides 2% on a "committed" basis.
The minimum OC level that is consistent with the Aa3 rating target is
9.0%, of which 0% should be provided 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.
--- PUBLIC-SECTOR COVERED BONDS
The cover pool losses are 8.7%, with market risk of
7.1% and collateral risk of 1.6%. The
collateral score for this programme is currently 3.2% and
the OC in this cover pool is 11.3%, of which Hypothekenbank
Frankfurt provides 2% on a "committed" basis.
The minimum OC level that is consistent with the Aa2 rating target is
10.0%, of which 0% should be provided 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.
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 EMEA Covered Bonds
Monitoring Overview", published quarterly. All numbers in
this section are based on Moody's most recent modelling (based on
data, as per 31 December 2012).
TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI),
which indicates the likelihood that timely payment will be made to covered
bondholders following issuer default. The effect of the TPI framework
is to limit the covered bond rating to a certain number of notches above
the issuer's rating.
For both the mortgage and public sector covered bonds, Moody's has
assigned a TPI of High.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the issuer's
credit strength.
The TPI Leeway measures the number of notches by which the issuer's rating
may be downgraded before the covered bonds are downgraded under the TPI
framework.
Based on the current TPIs of "High", the TPI Leeway
for the mortgage covered bonds programme is 0-1 notches.
This implies that the covered bonds might be downgraded as a result of
a TPI cap if the issuer rating is downgraded below Baa3 or Ba1,
all other variables being equal. The TPI leeway for the public-sector
covered bond is 0 notches, implying the covered bonds might be downgraded
as a result of a TPI cap if the issuer rating is downgraded further.
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 July 2012.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
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.
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
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
Vice President
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 Hypothekenbank Frankfurt's covered bonds
