OREANDA-NEWS. July 27, 2015. Fitch Ratings has affirmed Commerzbank AG's (CBK; BBB/Positive/F2/bbb) public sector Pfandbriefe at 'AAA', following an asset replacement in the cover pool as planned. The Outlook is Stable.

KEY RATING DRIVERS

The rating reflects CBK's Long-term Issuer Default Rating (IDR) of 'BBB', an unchanged Discontinuity Cap (D-Cap) of 5 (low risk), an IDR uplift of 2 and the 18% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the breakeven OC of 16%.

The affirmation is based on the reduction in foreign currency exposure as a result of the asset replacement and on Fitch's view that the issuer has sufficient OC to cover a 'AAA' stress scenario, including significant stresses applied on a 10% open foreign currency position in the cover pool. Asset and cash flow analysis results remain broadly in line with Fitch's June 2015 analysis.

As committed by the issuer in June 2015, 11% of the CHF assets forming part of the cover pool were replaced with German federal states assets so that the current open foreign currency position does not exceed 10% of cover assets. The current cover pool as per end-June 2015 has a 10% foreign currency open position consisting of Swiss franc- (6%) and US dollar- (4%) denominated public sector assets. Fitch still views this level as high and continues to apply significant foreign currency stresses in determining the breakeven OC as foreign currency depreciation may lead to an unpredictable deterioration of OC. The stresses applied by Fitch in its cash flow analysis consider highly adverse currency movements ranging from 1.4x to 3.0x the spot rate at end-June 2015 on both currencies.

The 'AAA' breakeven OC remains at 16% as Fitch had already taken into account the planned assets replacement in its June 2015 analysis (see "Fitch Affirms Commerzbank's Public Sector Pfandbriefe at 'AAA'; Outlook Stable" dated 05 June 2015 at www.fitchratings.com).

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded to 'BB+' or lower; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 5 or lower; or (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 16%.

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 Pfandbriefe following an issuer default. As a result, the Pfandbrief rating would likely be downgraded to 'A', composed of the IDR, as adjusted by the IDR uplift, of 'A-' and a single-notch recovery uplift.

The Fitch breakeven OC for the covered bond rating will be affected, among others, by 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.