OREANDA-NEWS. Fitch Ratings has affirmed Commerzbank AG's (CBK, BBB+/Stable/F2) mortgage Pfandbriefe at 'AAA' with a Stable Outlook, following a review of the programme after the transfer of Hypothekenbank Frankfurt's (HF) cover assets and outstanding mortgage Pfandbriefe to CBK.

KEY RATING DRIVERS

The rating is based on CBK's Long-Term Issuer Default Rating (IDR) of 'BBB+', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the lowest level of overcollateralisation (OC) of the last 12 months, currently 39.2%.

The programme's 'AAA' breakeven OC has increased to 15% from 10% over the past 12 months. The main driver of the breakeven OC remains the asset disposal loss component of 7.5%, which reflects the need for forced asset sales to ensure timely payment of all outstanding Pfandbriefe post issuer default. As the issuer is rated below 'A' or 'F1', we assumed a commingling loss to occur just prior to the issuer default.

The overall cover pool has grown significantly over the past 12 months to EUR17.4bn as of June 2016 from EUR6.64bn in June 2015. The programme continues to be exposed mainly to residential mortgages. Since the merger with HF's programme it also includes around 2% of commercial assets.

The increase of the credit loss component of 6.7% (up from 5.9% over the past 12 months) in the breakeven OC is driven by the 2% of the cover pool made of loans backed by commercial real estate, for which Fitch applied conservative assumptions due to data limitations.

The increase of Fitch's cash flow valuation component of 4.7% (up from 3.2% over the past 12 months) is mainly due to the inclusion of liabilities with high coupons as a result of the transfer of HF's outstanding mortgage Pfandbriefe to CBK.

Fitch applied variations from its "Criteria Addendum: Germany - Residential Mortgage Assumptions" published 25 May 2016. The low prepayment scenario of 1% per year was tested as the observed data did not support a low prepayment assumption of 0% for residential mortgage programmes with a seasoning of five years. For occupancy types and property types not mentioned in the "Criteria Addendum: Germany - Residential Mortgage Assumptions", Fitch applied the highest hit on foreclosure frequency. The variations are reflected in the asset and cash flow analysis and have no impact on the rating of CBK's mortgage Pfandbriefe.

Fitch applied a variation from "Covered Bonds Rating Criteria" published 11 March 2016 by taking into consideration that in its view, the cover pool at the time of the assumed issuer default will have a higher seasoning compared with the current pool, despite being replenished. The variation is reflected in the cash flow analysis and has no impact on the rating of CBK's mortgage Pfandbriefe.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) CBK's IDR is downgraded below 'BBB'; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 4 notches or lower; or (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 15%.

If the OC that Fitch considers in its analysis drops to the legal minimum requirement of 2% on a net present value basis, it would not be sufficient to allow for timely payment of the covered bonds following an issuer default. As a result, the covered bond rating would likely be downgraded to 'A+', reflecting a one-notch recovery uplift above the issuer's IDR, adjusted for the IDR uplift.

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.