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Fitch Affirms Commerzbank AG's SME Structured Covered Bonds at 'AA'; Outlook Stable
February 12, 2015 / 3:22 PM / 3 years ago

Fitch Affirms Commerzbank AG's SME Structured Covered Bonds at 'AA'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, February 12 (Fitch) Fitch Ratings has affirmed Commerzbank AG's (CBK, A+/Negative/F1+, Viability Rating: bbb) SME structured covered bonds at 'AA' with a Stable Outlook, following a periodic review of the programme. KEY RATING DRIVERS The rating is based on CBK's Long-term Issuer Default Rating (IDR) of 'A+', an unchanged Discontinuity Cap (D-Cap) of 8 (minimal) and the 16% contractual over-collateralisation (OC) that Fitch takes into account in its analysis. The D-Cap analysis reflects the minimal risk of payment discontinuation on the covered bonds post CBK's insolvency. After CBK defaults, the covered bonds benefit from a switch to pass-through mechanism if funds to repay the bonds at their expected maturity date are insufficient and a separate liquidity facility for each bond after a rating trigger breach. The 'AA' breakeven OC has decreased to 11% from 12.5%. However, this will only sustain the 'AA' covered bond rating as long as CBK remains rated 'A+'. The level of OC supporting the 'AA' covered bond rating following a limited downgrade of CBK's IDR is currently 16%, improved from 19% during the previous analysis. This is mainly driven by Fitch's reduced credit loss expectation that comes as a result of a more granular collateral pool and improved ratings distribution of its underlying obligors. The programme's credit loss component in a 'AA' rating scenario is revised to 17.6% from 20.3% a year ago and remains the main constituent of the breakeven OC. The cash flow valuation component (1.6%) is the second-largest driver of the breakeven OC. It has changed from 2.8% during last year's analysis, primarily reflecting a decrease of the programme's maturity mismatches. The marginal asset disposal loss component (0.5%) underlines the fact that no forced asset sales are necessary and is caused by negative carry. With a cut-off date 30 November 2014, CBK's EUR500m outstanding SME structured covered bonds were secured by a collateral pool of EUR605m, resulting in nominal OC of 21%. The collateral pool consists of 1,899 short-term money market to medium-term investment loans granted to 1,509 German SME borrower groups. The weighted average life (WAL) of the collateral pool has decreased to 1.7 from 1.8 years since the previous analysis. However, Fitch has modelled all loans with an extended maturity to account for the increased default risk of short-term bullet loans should CBK be unwilling or unable to refinance maturing loans. The agency assumed a minimum WAL of two years for all loans, leading to a stressed portfolio WAL of 2.3 years. All cover assets and the covered bonds are euro-denominated. The cover assets predominantly carry floating rate interest (55%), while the structured covered bonds pay a fixed coupon. Fitch has taken these mismatches into account by modelling the expected cash flows under appropriate stresses, as the existing market risks are not mitigated by privileged derivatives. However, a switch to pass-through of the bonds would also change their coupon payments from fixed to floating. The resulting open interest position is increasing for a longer pass-through period. RATING SENSITIVITIES The 'AA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by 10 or more notches to 'B' or lower; or (ii) OC that Fitch considers in its analysis drops below Fitch's 'AA' breakeven level of 11%. The Fitch breakeven OC for the covered bond rating will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the portfolio and Fitch's analysis will be available in a credit update, which will shortly be available at Contact: Primary Analyst Tobias Bayerl Analyst +49 69 768 076 126 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analyst Traycho Nikolov Director +49 69 768 076 150 Committee Chairperson Eberhard Hackel Senior Director +49 69 768 076 117 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available at Applicable criteria: 'Covered Bonds Rating Criteria', dated 08 August 2014, 'Criteria for Rating Granular Corporate Balance-Sheet Securitisations (SME CLOs)', dated 05 March 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 14 May 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 14 May 2014 are available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Criteria for Rating Granular Corporate Balance-Sheet Securitisations (SME CLOs) here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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