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Global Credit Research - 07 Oct 2010
Frankfurt am Main, October 07, 2010 -- Moody's Investors Service has today taken the following rating action
on Depfa Bank ACS' covered bonds (or asset-covered securities)
issued under Depfa's Irish public-sector covered bond programme
- Public-sector covered bonds: Aa3 placed on review
for possible downgrade; previously on 23 July 2010 downgraded to
Today's rating action was prompted by Moody's decision to downgrade the
issuer's senior unsecured ratings to Baa3 from A3 (see Moody's press
release dated 1 October 2010). The downgrade in the issuer's
rating will lead to an increase in the expected loss of the covered bonds.
Based on Moody's current modelling and the over-collateralisation
in place as of June 2010, an A2 rating for Depfa's covered
bond would be consistent with Moody's expected loss analysis.
However, Moody's understands that the issuer is in the process
of improving the collateral credit quality. During the review process,
Moody's will assess the impact of the changes to the cover pool
and the lower issuer rating on its expected loss analysis. Moody's
will also review the TPI based on collateral quality and refinancing risk
of the cover pool in event of issuer default. Based on the current
issuer rating and a TPI of Probable-High, Depfa Bank ACS'
covered bond rating cannot be higher than Aa3.
All the covered bonds benefit from two layers of protection by having
recourse to both the issuer and a collateral pool. The ratings
therefore take into account the following factors:
(i) The credit strength of the issuer, currently rated Baa3;
(ii) The cover pool's credit quality. The public-sector
covered bonds are backed by claims against public-sector entities
or claims guaranteed by such entities.
(iii) While the over-collateralisation level was 9.3%
as of June 2010, only 5% is considered "committed" by Moody's.
Moody's considers the remaining over-collateralisation over and
above this 5% level as voluntary over-collateralisation.
For Irish issuers rated below Prime-1, Moody's would
typically limit the value it gives to voluntary over-collateralisation
in its expected loss analysis.
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.
The Aa3 rating on review for possible downgrade assigned to the existing
covered bonds are expected to be assigned to all subsequent covered bonds
issued by the issuers under these programmes and any future rating actions
are expected to affect all such covered bonds. If there are any
exceptions to this, Moody's will, in each case, publish
details in a separate press release.
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 a function of the
issuer's probability of default, and the stressed losses on the
cover pool assets, following a default of the issuer.
The Cover Pool Losses for this programme are 25%. This is
an estimate of the losses Moody's currently models in the event of issuer
default. Cover Pool Losses can be split between Market Risk of
22.5% and Collateral Risk of 2.5%.
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 cover pool assets.
Collateral Risk is derived from the Collateral Score, which for
this programme is currently 5%.
TPI FRAMEWORK: Moody's assigns a 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
The resilience of a covered bond rating largely depends on the credit
strength of the issuer.
The number of notches that an issuer's rating may be downgraded before
the covered bonds are downgraded under the TPI framework, is measured
by the TPI Leeway. Given the current TPI of Probable-High,
and the issuer rating of Baa3, the current TPI cap for these bonds
is "Aa3". Thus, under Moody's TPI framework,
the lowest issuer rating that is consistent with a Aa3 covered bond rating
is Baa3; i.e., any further downgrade of the senior
unsecured rating of the bank would lead to a downgrade of its covered
bonds under Moody's TPI framework.
A multi-notch downgrade of the covered bonds might occur in certain
circumstances, such as (i) a sovereign downgrade that negatively
affects both the issuer's senior unsecured rating and the TPI; (ii)
a multi-notch downgrade of the issuer; or (iii) a material
reduction in the cover pool's value.
For further details on Cover Pool Losses, Collateral Risk,
Market Risk, Collateral Score and TPI Leeway across all covered
bond programmes rated by Moody's please refer to "Moody's EMEA Covered
Bonds Monitoring Overview", published quarterly. These figures
are based on the most recent Performance Overview published by Moody's
and are subject to change.
The principal methodology used in rating the issuer's covered bonds is
"Moody's Rating Approach to Covered Bonds" published in March 2010.
Other methodologies and factors that may have been considered in the rating
process can also be found on the Moody's website. In addition,
Moody's publishes a weekly summary of structured finance credit,
ratings and methodologies, available to all registered users of
our website, at www.moodys.com/SFQuickCheck.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, confidential and proprietary Moody's Analytics'
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Frankfurt am Main
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
Moody's places Depfa Bank ACS's public-sector covered bonds on review for possible downgrade
An der Welle 5
Frankfurt am Main 60322
No Related Data.
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