Frankfurt am Main, July 03, 2012 -- Moody's Investors Service has today placed on review for downgrade the
Aa1 rating of Deutsche Pfandbriefbank AG's mortgage covered bonds
and the Aaa rating of Deutsche Pfandbriefbank's public-sector
covered bonds. Both programmes are governed by the German Pfandbrief
Act.
RATINGS RATIONALE
Today's announcement was prompted by the review for downgrade of
Deutsche Pfandbriefbank's A3 senior unsecured ratings (see Moody's
press release "Moody's reviews Deutsche Pfandbriefbank's ratings
for downgrade" published on 3 July 2012). Any downgrade of
the issuer ratings would negatively affect the covered bond ratings through
their impact on both the expected loss method and the timely payment indicator
(TPI) framework.
TPI FRAMEWORK
The driver of this rating announcement is Moody's TPI framework.
The review of the issuer's senior unsecured rating indicates that
the rating is likely to stay investment grade. Given the limited
leeway under the TPI framework that the covered bonds have to any downgrade
of the issuer's senior unsecured rating, Moody's has
placed the ratings of both the mortgage and public-sector covered
bonds on review for downgrade. Based on the current TPIs,
a single-notch downgrade of the issuer's senior unsecured
rating is expected to lead to a downgrade of the public-sector
covered bonds and a two-notch downgrade is expected to lead to
a downgrade of both the mortgage covered bonds and the public-sector
covered bonds.
EXPECTED LOSS ANALYSIS
On an expected loss basis a deterioration of the issuer's rating will
lead to an increase in the expected loss of the covered bonds.
Moody's notes that issuers may be able to offset any deterioration in
the expected loss analysis by adding further collateral to their programmes.
However, if Moody's downgrades the issuer rating, the
rating agency will also assess whether the form of the available over-collateralisation
(OC) in both programmes constrains the covered bond ratings.
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 (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.
As of 31 December 2011, the cover pool losses for Deutsche Pfandbriefbank's
mortgage covered bonds are 18.0%. This is an estimate
of the losses Moody's currently models if the issuer defaults.
Cover pool losses can be split between market risk of 12.1%
and collateral risk of 5.9%. 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, which for this programme is currently 8.8%.
As of 31 December 2011, the OC in the mortgage cover pool is 46.2
%, of which 2.0% is provided on a "committed"
basis. The minimum OC level that is consistent with the Aa1 rating
target is 9.5% (numbers in net present value terms).
Therefore, Moody's is relying on "uncommitted"
over- collateralisation in its expected loss analysis.
As of 31 December 2011, the cover pool losses for Deutsche Pfandbriefbank's
public-sector covered bonds are 9.7%. This
is an estimate of the losses Moody's currently models if the issuer defaults.
Cover pool losses can be split between market risk of 7.3%
and collateral risk of 2.3%. 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, which for this programme is currently 4.3%.
As of 31 December 2011, the OC in the public-sector cover
pool is 9.1 %, of which 2.0% is provided
on a "committed" basis. The minimum OC level that is
consistent with the Aaa rating target is 8.5% (numbers in
net present value terms). Therefore, 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.
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 Deutsche Pfandbriefbank's mortgage and public-sector
covered bonds, Moody's has assigned a TPI of "Probable-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 TPI of Probable-High, the TPI Leeway
for the mortgage programme 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.
Based on the current TPI of Probable-High ,the TPI Leeway
for the public-sector programme is 0 notches, meaning the
covered bonds might be downgraded as a result of a TPI cap once the issuer
rating is downgraded below A3, all other variables being equal.
A multiple-notch downgrade of the covered bonds might occur in
certain limited circumstances, such as (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 the euro area crisis continues, the ratings of covered bonds
remain exposed to the uncertainties of credit conditions in the general
economy. The deteriorating creditworthiness of euro area sovereigns
as well as the weakening credit profile of the global banking sector could
negatively impact the ratings of covered bonds. For more information
please refer to the Rating Implementation Guidance published on 13 February
2012 "How Sovereign Credit Quality May Affect Other Ratings". Furthermore,
as discussed in Moody's special report "Rating Euro Area Governments Through
Extraordinary Times -- An Updated Summary," published
in October 2011, Moody's is considering reintroducing individual
country ceilings for some or all euro area members, which could
affect further the maximum structured finance rating achievable in those
countries. Moody's is also continuing to consider the impact of
the deterioration of sovereigns' financial condition and the resultant
asset portfolio deterioration in covered bond transactions.
RATING METHODOLOGY
The principal methodology used in these ratings 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 ratings have been disclosed to the rated entities or their designated
agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not 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
entities, obligations or credits satisfactory for the purposes of
issuing these reviews.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings 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 entities or their 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.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
Martin Lenhard
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
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 Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's reviews covered bonds of Deutsche Pfandbriefbank for downgrade
