Covered Bond Ratings On Depfa ACS - Hypo Real Estate Holding AG

Covered Bond Ratings On Depfa ACS Bank's
Public-Sector Covered Bonds Lowered; Outlook
Stable
Surveillance Credit Analyst:
Andrew O'Neill, London (44) 20-7176-3578; andrew_oneill@standardandpoors.com
Secondary Contact:
Casper R Andersen, London (44) 20-7176-6757; casper_andersen@standardandpoors.com
OVERVIEW
• On Aug. 26, 2011, we placed our ratings on Depfa ACS Bank's public-sector
covered bonds on CreditWatch with negative implications as the
overcollateralization level in the cover pool was no longer sufficient to
support the maximum potential covered bond rating.
• Since then, we have assessed the issuer's willingness and ability to
manage overcollateralization at a higher level. We have not observed any
increase in available overcollateralization, despite the fact that, in
our view, the credit quality of the cover pool of mainly European
public-sector assets has deteriorated.
• We are lowering our ratings on Depfa ACS Bank's public-sector covered
bond programs and related issuances and removing them from CreditWatch to
reflect our opinion of the increasing credit risk of the cover pool
assets, and the fact that, in our view, the issuer is not managing
overcollateralization to a level that we consider to be commensurate with
an uplift above the issuer credit rating on the bank.
• The outlook on these public-sector covered bonds is stable, reflecting
the stable outlook on the issuer credit rating.
• These ratings are based on our criteria for rating covered bonds (see
"Advance Notice Of Proposed Criteria Change: Methodologies And
Assumptions For Rating Certain Covered Bonds And CDOs", published on Aug.
5, 2010). However, the methodologies and assumptions underlying these
criteria are under review. The ratings on all outstanding covered bonds
in this program may be affected as a result of this review.
March 26, 2012
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Covered Bond Ratings On Depfa ACS Bank's Public-Sector Covered Bonds Lowered; Outlook Stable
LONDON (Standard & Poor's) March 26, 2012--Standard & Poor's Ratings Services
today lowered its ratings on Depfa ACS Bank's (BBB/Stable/A-2) public-sector
covered bond programs and related issuances. We have lowered the long-term
covered bond rating to 'BBB' from 'AA', and the short-term covered bond rating
to 'A-2' from 'A-1+'. At the same time we have removed the covered bond
ratings from CreditWatch, where they were placed with negative implications on
Aug. 26, 2011. The outlook is stable (see list below).
The rating action follows our review of the information provided with respect
to cover pool characteristics and cash flows (as of Feb. 29, 2012). We have
applied our covered bond criteria and have reviewed the current
asset-liability maturity mismatch (ALMM) risk classification, the program's
categorization, the maximum potential covered bond ratings uplift, the cash
flow and market value risk, and the credit enhancement provided (see "Revised
Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In
Covered Bonds," published on Dec. 16, 2009).
As a result of this analysis, we have determined the maximum potential ratings
uplift for Depfa ACS Bank's public-sector covered bond program to be six
notches above the 'BBB' long-term issuer credit rating (ICR) on the bank. This
is based on a program categorization of "2" and an ALMM classification of
"low".
We assign the rating to the covered bond program by assessing whether the
available credit enhancement is equal to or greater than the target credit
enhancement for the maximum potential rating under our criteria. The rating on
the issuer is the floor to the covered bond rating. To determine the degree to
which a covered bond rating may exceed the ICR, we assign the first notch of
uplift if the available credit enhancement can mitigate the asset default
risk. We calculate the overcollateralization which would cover the asset
default risk which we deem commensurate with a 'AAA' rating, by applying to
the scheduled cash flows:
• the impact of missed payments and delayed recoveries arising from 'AAA'
default stresses applied to the cover assets;
• the implications of interest rate and foreign exchange mismatches between
the cover assets and the covered bonds; and
• the degree to which counterparty risk is mitigated according to our
criteria.
For any further elevation to the maximum potential rating, the remaining
credit enhancement should be able to cover the market value risk arising from
ongoing asset-liability mismatch.
Based on this application of our criteria for assessing ALMM risk in covered
bonds and our cash flow assumptions, which address market value risk, we
believe that a credit enhancement level of 11.67% would currently be
commensurate with the maximum potential 'AA' rating. We also believe that a
credit enhancement level of 6.36% would currently cover all credit risks
related to the default of the cover pool assets, and would therefore be
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Covered Bond Ratings On Depfa ACS Bank's Public-Sector Covered Bonds Lowered; Outlook Stable
commensurate with a one-notch uplift above the ICR.
As of Feb. 29, 2012, there were about €28.4 billion of covered bonds
outstanding, secured by about €28.9 billion of public-sector assets. The
geographic distribution of the public-sector assets is shown below.
Country exposure % pool
Germany 29%
U.S. 21%
Spain 9%
Belgium 6%
Supranationals 5%
Netherlands 5%
France 4%
Italy 4%
Other 17%
The available overcollateralization of 1.74% was below the level we would
consider commensurate with the first notch of uplift above the ICR.
Consequently, we have not assigned any notches of uplift. The 'BBB' rating
assigned to the covered bond programs and issuances is equal to the ICR on
Depfa ACS Bank. The stable outlook also reflects the outlook on the ICR.
Since we placed Depfa ACS Bank's covered bonds on CreditWatch on Aug. 26,
2011, we have assessed the issuer's willingness and ability to manage
overcollateralization at a higher level, and in particular whether the
restructuring of the Hypo Real Estate group would impact the ongoing
management level of overcollateralization. We have not observed any increase
in available overcollateralization over this period.
The issuer has maintained a stable level of overcollateralization, despite the
fact that, in our opinion, the credit quality of the cover pool has
deteriorated. We have reassessed our view of the creditworthiness of certain
European public-sector borrowers to reflect the downgrade of eurozone
sovereigns on Jan. 13, 2012. We have lowered ratings on U.S. student loan
securitizations, which are included in the cover pool. We also note that
following redemptions in February 2012, about €3 billion of assets were
removed from the cover pool. A Spanish public-sector exposure, for which our
credit quality assessment would be in the 'BB' category, remains in the cover
pool and represents an increased share of about 6% following the asset
removals. The assumed rating distribution of the cover pool assets in our
analysis as of Feb. 29, 2012, is shown below.
Rating distribution by category % pool
AAA 26%
AA 48%
A 11%
BBB 7%
BB and below 8%
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Covered Bond Ratings On Depfa ACS Bank's Public-Sector Covered Bonds Lowered; Outlook Stable
We note that the overcollateralization ratios which we publish differ from
those published by the issuer. This is a result of different presentation of
zero-coupon liabilities. Data published by the issuer is based on zero-coupon
bonds presented at their current notional amount, as per legal reporting
requirements. In our publications we present zero-coupon bonds at their final
redemption amount, consistently for all issuers. Under the issuer's reporting
convention, as of Feb. 29, 2012, there were about €26.7 billion of covered
bonds outstanding, secured by about €29 billion of public-sector assets,
resulting in available credit enhancement of 8.81%.
Our calculation of target credit enhancement levels is based on asset and
liability cash flows, and not on initial nominal balances. Therefore, in our
view, the difference in the overcollateralization ratios is presentational
only. Based on the issuer's presentation of overcollateralization ratios, the
credit enhancement level commensurate with the first notch of uplift would be
13.75% and the credit enhancement commensurate with the maximum achievable
rating would be 19.43%. This presentational difference has increased over time
as cash-pay issuances have been redeemed, leaving zero-coupon bonds as an
increasing portion of outstanding liabilities.
POTENTIAL EFFECTS OF PROPOSED CRITERIA CHANGES
We have taken today's rating actions on these covered bonds based on our
criteria for rating covered bonds (see "Revised Methodology And Assumptions
For Assessing Asset-Liability Mismatch Risk In Covered Bonds," published on
Dec. 16, 2009). The assumptions and methodologies used in the credit and cash
flow analysis are currently under review (see "Advance Notice Of Proposed
Criteria Change: Methodologies And Assumptions For Rating Certain Covered
Bonds And CDOs," published on Aug. 5, 2010). The scope of our review of the
analysis of public-sector assets may include our default rate stresses,
correlation assumptions, recovery levels, model risk, concentration limits,
and credit enhancement levels. Further, as part of our cash flow analysis, we
used Standard & Poor's Covered Bond Monitor to calculate the target credit
enhancement for the covered bonds. The assumptions and methodologies used in
this cash flow analysis are also under review.
This review may result in further changes to the criteria. As a result, our
future assumptions and methodologies may differ from our current criteria. The
criteria change may affect the ratings on all outstanding covered bonds in
this program. Until such time that we adopt new criteria for rating covered
bonds, we will continue to rate and surveil these covered bonds using our
existing criteria (see "Related Criteria And Research").
RELATED CRITERIA AND RESEARCH
• Depfa Bank plc, March 19, 2012
• Global Covered Bond Characteristics And Rating Summary Q4 2011, Jan. 24,
2012
• Request For Comment: Counterparty And Supporting Obligations Methodology
And Assumptions--Expanded Framework, Nov. 21, 2011
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• Global Structured Finance Scenario And Sensitivity Analysis: The Effects
Of The Top Five Macroeconomic Factors, Nov. 4, 2011
• Request For Comment: Covered Bonds Counterparty And Supporting
Obligations Methodology And Assumptions, March 23, 2011
• Principles Of Credit Ratings, Feb. 16, 2011
• Counterparty And Supporting Obligations Update, Jan. 13, 2011
• Counterparty And Supporting Obligations Methodology And Assumptions, Dec.
6, 2010
• Advance Notice Of Proposed Criteria Change: Methodologies And Assumptions
For Rating Certain Covered Bonds And CDOs, Aug. 5, 2010
• Methodology: Credit Stability Criteria, May 3, 2010
• Revised Methodology And Assumptions For Assessing Asset-Liability
Mismatch Risk In Covered Bonds, Dec. 16, 2009
• European Legal Criteria For Structured Finance Transactions, Aug. 28,
2008
• Methodology & Assumptions: Applying The Derivative Counterparty Framework
To Covered Bonds, Feb. 26, 2008
• Revised Framework for Applying Counterparty and Supporting Party Criteria,
May 8, 2007
• CDO Spotlight: Rating Approach To Synthetic CDOs Of Sovereigns Or Local
And Regional Governments, May 3, 2006
• Surviving Stress Scenarios: Assessing Asset Quality of Public Sector
Covered Bond Collateral, Sept. 30, 2003
• Irish Covered Bonds Eligible For A Delinked Rating Approach, Feb. 19,
2003
RATINGS LIST
Rating Program/ To From
Country: Covered bond type
RATINGS LOWERED AND REMOVED FROM CREDITWATCH NEGATIVE; NEGATIVE OULOOK
ASSIGNED
Depfa ACS Bank
Covered Bond Ratings On Depfa ACS Bank's Public-Sector Covered Bonds Lowered; Outlook Stable
BBB/Stable AA/Watch Neg
LONG-TERM RATING ON THE PROGRAM LOWERED
BBB AA
SHORT-TERM RATING ON THE PROGRAM LOWERED
A-2 A-1+
Ireland: Public-Sector Covered Bonds
Additional Contact:
Covered Bonds Surveillance; CoveredBondSurveillance@standardandpoors.com
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