Madrid, June 15, 2020 -- Moody's Investors Service ("Moody's") has downgraded to Aa3 from Aa2 the
ratings assigned to the mortgage covered bonds issued by Unicredit Bank
Czech Republic and Slovakia, a.s. (the issuer/ Unicredit)
(ratings undisclosed).
RATINGS RATIONALE
This rating action follows the conversion of Unicredit's existing Czech
covered bonds (mortgage bonds) into new covered bonds. The new
covered bonds are now governed by a revised legal framework that addresses
key weaknesses but increases uncertainty on unsecured claims.
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 loss following a CB anchor event will primarily depend on: (1)
the value of the cover pool in relation to the outstanding covered bonds;
and potentially (2) any additional unsecured claim against the issuer.
However, in this case, the revised law increases uncertainty
about the extent to which covered bondholders would benefit from an unsecured
claim against the issuer's bankruptcy estate. Under the revised
framework, the unsecured claim is limited to over-indebtedness
(calculated by comparing the nominal value of cover pool assets to outstanding
covered bonds) established within two months of bankruptcy. Therefore,
covered bondholders may be unable to register unsecured claims for over-indebtedness
that arises beyond the 2 month registration period or for shortfalls resulting
from market risks. Moreover, in certain circumstances,
the revised framework requires covered bonds, and consequently any
registered unsecured claim, to be written down.
This uncertainty on the unsecured claims increases the stressed losses
on the cover pool assets following a CB anchor event.
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.
The CB anchor for this programme is CR assessment plus 1 notch.
The cover pool losses for this programme are 46.6%.
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 31.0% and collateral risk of 15.6%.
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 23.3%.
The over-collateralisation in the cover pool is 34.6%,
of which the issuer provides 10% on a "committed" basis.
Under Moody's COBOL model, the minimum OC consistent with
the Aa3 rating is 0%. These numbers show that Moody's
is not 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 "Covered Bonds Sector Update",
published quarterly.
TPI FRAMEWORK: Moody's assigns a TPI, which is our assessment
of the likelihood of timely payment of interest and principal 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 UniCredit Bank Czech Republic and Slovakia - Mortgage Covered
Bonds, Moody's has assigned a TPI of Improbable.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's Approach
to Rating Covered Bonds" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1154442.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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.
The TPI Leeway for this programme is unpublished.
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.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Moody's did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
The ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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.
Tomas Rodriguez-Vigil
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Jose de Leon
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
