London, 12 November 2015 -- Moody's Investors Service has downgraded the ratings on Kommunalkredit
Austria AG's covered bonds to Baa2 and placed them on review for
downgrade, from Aa3 where they were on review with direction uncertain.
RATINGS RATIONALE
Today's downgrade action follows the assignment of an unpublished,
private monitored counterparty risk (CR) assessment to Kommunalkredit
Austria AG, as the new entity, following the demerger of the
old entity of Kommunalkredit Austria AG into Kommunalkredit Austria AG
(the new entity) and KA Finanz AG. The main drivers for the rating
action include: (1) the impact on Moody's analysis of the
newly assigned CR assessment for the new entity of Kommunalkredit Austria
AG; (2) the fall in the level of committed over-collateralisation
(OC) following the demerger; and (3) the material increase in the
programme's foreign exchange rate risk following the demerger.
PRIVATE COUNTERPARTY RISK ASSESSMENT ASSIGNED TO THE NEW ENTITY
Following the demerger of Kommunalkredit Austria AG (old entity),
Moody's has assigned an unpublished, private monitored CR
assessment to Kommunalkredit Austria AG (new entity). Before Moody's
initially placed the covered bonds on review in June 2014, the covered
bond (CB) anchor reflected the issuer's Baa3 senior unsecured rating
(See press release published on 23 June 2014, http://www.moodys.com/viewresearchdoc.aspx?docid=PR_302157).
OC COMMITMENT WILL FALL FOLLOWING THE DEMERGER
On 2 October 2015, the issuer announced it will terminate a commitment
to hold 28% minimum OC in accordance with its termination right
provided for in the OC agreement. The issuer publicly stated that
it intends to hold a lower level of OC going forward, none of which
is expected to be in a "committed" form (see "Demerger
of Kommunalkredit Allows Lower Over-Collateralisation of Covered
Bonds, a Credit Negative", published on 19 March 2015).
THE PROGRAMME'S FOREIGN EXCHANGE RISK HAS MATERIALLY INCREASED
Following the demerger, Kommunalkredit Austria AG took over all
of Kommunalkredit Austria AG's (old entity) swiss franc-denominated
covered bonds. As a result, 81.3% of Kommunalkredit
Austria AG's covered bonds are denominated in swiss francs, while
only 8.2% of the cover pool's assets are denominated
in swiss francs.
REVIEW FOR DOWNGRADE
The placement of the covered bonds' ratings on review for downgrade
reflects that Moody's is awaiting feedback on the level of uncommitted
OC that will remain in the programme. The level of uncommitted
OC commensurate with the current Baa2 rating is 14.5%.
While the programme is expected to benefit from 28% OC until the
end of this year, the OC level is expected to fall next year,
as per the issuer's statement.
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 the 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 one
notch above the CR assessment 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 40.3%.
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 31.7% and collateral risk of 8.6%.
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 17.3%.
The current OC in the cover pool is 37.5% but the issuer
is expected to remove committed OC early next year.
The minimum OC level consistent with a Baa2 rating is 14.5%,
of which the issuer would need to provide 0% in a "committed"
form. Therefore, Moody's will be relying on "uncommitted"
OC in its expected loss analysis if the issuer removes the committed OC
as is expected. The minimum OC level consistent with a Baa3 rating
is 0%.
All numbers in this section are based on Moody's most recent modeling
(based on data as of 26 September 2015). 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 "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 Kommunalkredit Austria AG's public sector covered bonds,
Moody's has assigned a TPI of High. The TPI framework does currently
not constrain the covered bond rating.
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. An upgrade could
occur if the CB anchor were to improve and the OC were to remain at the
current level. A downgrade could also occur if the level of OC
were to decrease. 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.
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, for example, because of a reduction in OC.
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.
Alexander Zeidler
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 Kommunalkredit Austria AG's public sector covered bonds and places them on review for downgrade
