London, 18 January 2012 -- Moody's Investors Service has today placed on review for downgrade the
Aaa ratings assigned to the mortgage Pfandbriefe and the public-sector
Pfandbriefe issued by Eurohypo AG under the German Pfandbrief Act.
RATINGS RATIONALE
The above reviews were prompted by Moody's review of the A3 issuer
rating, see press release "Moody's reviews for downgrade long and
short-term ratings of Commerzbank AG & subsidiaries",
published on 18 January 2012.
Any downgrade of the issuer ratings would negatively affect the covered
bonds through their impact on both the expected loss method and the timely
payment indicator (TPI) framework.
EXPECTED LOSS METHOD
As the issuer's credit strength is incorporated into Moody's expected
loss assessment, any downgrade of the issuer's rating will increase
the expected loss on the covered bonds. However, Moody's
notes that the issuer may be able to offset any deterioration in the expected
loss analysis if sufficient collateral is held in the cover pool.
Moody's notes that if the issuer rating is downgraded below A3,
limited value will be given to collateral that is not considered "committed".
Moody's considers over-collateralisation to be "committed" if the
issuer's discretion to remove this over-collateralisation is sufficiently
restricted.
TPI FRAMEWORK
The current TPI for both the mortgage and the public-sector Pfandbriefe
is "High". Given these TPIs, if the issuer rating falls below
Baa1, the ratings assigned to the covered bonds will be capped at
a level lower than Aaa.
The current ratings assigned to the existing covered bonds of the above
programmes can be expected to be assigned to all subsequent covered bonds
issued under the relevant programme and any future rating actions are
expected to affect all covered bonds issued under the programme.
If there are any exceptions to this, Moody's will in each case publish
details in a separate press release.
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:
expected loss analysis and 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 (i) a function
of the issuer's probability of default (measured by the issuer's
rating); and (ii) the stressed losses on the cover pool assets following
issuer default.
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, Eurohypo AG's mortgage and public-sector
Pfandbriefe, Moody's has assigned a TPI of High.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the credit
strength of the issuer.
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 TPI of High, the TPI Leeway for both,
the mortgage Pfandbriefe and the public-sector Pfandbriefe,
is one notch meaning the covered bonds might be downgraded as a result
of a TPI cap once the issuer rating is downgraded below Baa1, all
other variables being equal.
A multiple-notch downgrade of the covered bonds might occur in
certain limited circumstances. Some examples might be (i) a sovereign
downgrade negatively affecting both the issuer's senior unsecured rating
and the TPI; (ii) a multiple-notch downgrade of the issuer;
or (iii) a material reduction of the value of the cover pool.
As noted in Moody's comment 'Rising Severity of Euro Area Sovereign Crisis
Threatens Credit Standing of All EU Sovereigns' (28 November 2011),
the risk of sovereign defaults or the exit of countries from the Euro
area is rising. As a result, Moody's could lower the maximum
achievable rating for covered bonds transactions in some countries,
which could result in rating downgrades.
RATING METHODOLOGY
The principal methodology used in this rating was "Moody's
Approach to Rating Covered Bonds" published in March 2010.
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 relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
this review.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%)
and for (B) further information regarding certain affiliations that may
exist between directors of MCO and rated entities as well as (C) the names
of entities that hold ratings from MIS that have also publicly reported
to the SEC an ownership interest in MCO of more than 5%.
A member of the board of directors of this rated entity may also be a
member of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
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.
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
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 reviews Aaa ratings of Eurohypo's Pfandbriefe for downgrade
