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Fitch Affirms 2 Swiss Mortgage Covered Bonds Programmes on New Criteria
December 20, 2016 / 4:10 PM / a year ago

Fitch Affirms 2 Swiss Mortgage Covered Bonds Programmes on New Criteria

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Switzerland Covered Bond Programmes - Rating Action Report here FRANKFURT/LONDON, December 20 (Fitch) Fitch Ratings has affirmed two Swiss mortgage covered bonds programmes at 'AAA'. The rating actions conclude the implementation of the agency's revised Covered Bonds Rating Criteria published on 26 October 2016 and also follow the review of both programmes. The rating actions are as follows: - Credit Suisse AG's, (CS; A/Stable/F1) mortgage covered bonds programme affirmed at 'AAA'; Outlook Stable - UBS AG's, (UBS; A+/Stable/F1) mortgage covered bonds programme affirmed at 'AAA'; Outlook Stable Issuer Default Rating (IDR) Uplift Fitch has assigned CS's and UBSs covered bond programmes a two-notch IDR uplift. Swiss covered bonds are eligible for a maximum IDR uplift of two notches given their exemption from bail-in in a resolution scenario, Fitch's assessment that a resolution of the issuer will not result in the direct enforcement of recourse against the cover pool and the low risk of undercollateralisation at the point of resolution (see Fitch's Jurisdictional Analysis of the Risk of Undercollateralisation of Covered Bonds - Excel file published on 29 June 2016). Payment Continuity Uplift (PCU) Fitch has assigned a PCU of four notches to CS's covered bond programmes, despite most outstanding bonds containing a soft-bullet feature. This is because the longest running bond, which has a final maturity date that exceeds the penultimate bond by almost 18 years, is a hard bullet bond. The agency has assigned UBS's covered bond programme a PCU of six notches. This reflects that after the maturity of the last remaining hard bullet bond in 1Q17 all remaining bonds will contain a soft-bullet feature. Recovery Uplift Swiss covered bond programmes are generally eligible for two notches of recovery uplift. However, the recovery uplift for CS and UBS covered bond programmes is capped at one notch, due to foreign-exchange risk having a material impact on recoveries given a default of the covered bonds. This is because the cover assets are denominated in CHF while outstanding covered bonds are denominated in currencies other than CHF. Although swaps on the liabilities are in place, we expect those swaps to terminate upon a covered bond default. This would mean cash flows on the stressed longer-dated CHF assets would provide recoveries in a different currency to the covered bonds. Breakeven OC for the Ratings For CS the breakeven asset percentage (BE AP) has decreased to 85% from 86% while for UBS the BE AP has increased to 88% from 87%. The driving factors for the changes in BE AP are described in the Key Rating Drivers below. A summary of rating steps for the programmes mentioned in this commentary can be found in the excel file "Swiss Covered Bond Programmes - Rating Action Report" dated 20 December 2016 which can be accessed in the link above. KEY RATING DRIVERS CS The mortgage covered bonds of CS are rated 'AAA', five notches above the bank's Long-Term IDR of 'A'. This is based on an unchanged IDR uplift of two notches, an updated PCU of four notches and a reduced recovery uplift of one notch. The AP of 85% which Fitch relies upon in its analysis (investor report, September 2016) provides the same level of protection as the BE AP of 85% for a 'AAA' rating. The breakeven AP corresponds to a 'AA+' tested rating on a probability of default (PD) basis and a one notch recovery uplift, as opposed to the 'AA' PD basis with two notches of recovery uplift in the past. The main driver for the lower BE AP is the new 'AA+' tested PD scenario as well as updated prepayment assumptions applied in the analysis. The Stable Outlook on the covered bonds reflects that on the bank's Long-Term IDR. The 'AAA' BE AP of 85%, corresponding to a breakeven overcollateralisation of 17.9%, is driven by an asset disposal loss component of 7.3%. The lower prepayment rate of 0% (previously 3%) assumed in the analysis has increased the amount of assets modelled by Fitch to be sold to cover the large value of maturing liabilities following a switch of recourse to the cover pool. The cash flow valuation component amounts to 6.9%, which has decreased from the last analysis due to improved excess spread modelled by Fitch in the programme as a result of updated spread information. The credit loss component remains fairly stable at 3.7%. Fitch has updated the asset analysis with stable results: 16.6% 'AA+' weighted average (WA) foreclosure frequency (FF) and 78.3% 'AA+' WA recovery rate (RR). UBS The mortgage covered bonds of UBS are rated 'AAA', four notches above the bank's Long-Term IDR of 'A+'. This is based on an unchanged IDR uplift of two notches, an updated PCU of six notches and a reduced recovery uplift of one notch. The AP of 86% which Fitch relies upon in its analysis (investor report, September 2016) provides more protection than the breakeven AP of 88% for a 'AAA' rating. The breakeven AP corresponds to a 'AA+' tested rating on a PD basis and a one notch recovery uplift, as opposed to the 'AA' PD basis with two notches of recovery uplift in the past. The main driver for the higher BE AP is the new maturity extension period of 17 years (previously 19 years) assumed by Fitch under its Swiss Criteria Addendum. The new maturity extension period is the result of a slightly improved weighted average current loan-to-value ratio, which places the programme in a lower maturity extension bucket. The updated maturity extension period has offset the decrease in AP stemming from a higher 'AA+' tested PD scenario as well as updated prepayment assumptions applied in the analysis. The Stable Outlook on the covered bonds reflects that on the bank's Long-Term IDR. The 'AAA' BE AP of 88%, corresponding to a breakeven overcollateralisation of 13.7%, is driven by an asset disposal loss component of 11.7%. The lower prepayment rate of 0% (previously 3%) assumed in the analysis has increased the amount of assets modelled by Fitch to be sold to cover the large value of maturing liabilities following a switch of recourse to the cover pool. The cash flow valuation component amounts to -1.1%, which has decreased from the last analysis due to an improved excess spread modelled by Fitch in the programme. The improved excess spread reflects a better match between assets and liabilities driven by the new maturity extension period of 17 years compared with 19 years before. The credit loss component remains fairly stable at 3.1%. Fitch has updated the asset analysis with stable results: 17.9% 'AA+' WAFF 17.9% and 83.2% 'AA+' WARR. RATING SENSITIVITIES Credit Suisse AG (CS) Covered Bonds All else being equal, the 'AAA' rating of CS's covered bonds is vulnerable to a downgrade if any of the following occurs: (i) CS's IDR is downgraded by 3 or more notches to 'BBB' or below; or (ii) the PCU falls by 3 categories to 1; or (iii) the AP that Fitch considers in its analysis increases above Fitch's new 'AAA' breakeven level of 85.0%. UBS AG (UBS) Covered Bonds All else being equal, the 'AAA' rating of UBS's covered bonds is vulnerable to a downgrade if any of the following occurs: (i) UBS's IDR is downgraded by 6 or more notches to 'BB+' or below; or (ii) the PCU falls by 6 categories to 0; or (iii) the AP that Fitch considers in its analysis increases above Fitch's new 'AAA' breakeven level of 88.0%. Contact: Primary Analyst Thomas Kaber Associate Director +49 69 768076 172 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Secondary Analyst Jan Seemann, CFA Director +49 69 768076 112 Committee Chairperson Rebecca Holter Senior Director +49 69 768076 261 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016) here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria Addendum: Switzerland - Residential Mortgage Assumptions (pub. 17 May 2016) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016) here EMEA RMBS Rating Criteria (pub. 29 Nov 2016) here Fitch's Cover Asset Refinancing Spread Level (RSL) Assumptions - Excel File (pub. 26 Oct 2016) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 May 2016) here Fitch's Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance - Excel File (pub. 26 Oct 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Related Research Fitch's Jurisdictional Analysis of the Risk of Undercollateralisation of Covered Bonds - Excel file here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016787 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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