OREANDA-NEWS. Fitch Ratings has affirmed Credit Suisse AG's (CS, A/Positive/F1) CHF9.8bn equivalent outstanding mortgage covered bonds at 'AAA' with Stable Outlook.

KEY RATING DRIVERS
The rating is based on CS's Long-term Issuer Default Rating (IDR) of 'A', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap of 3 (moderate high risk) and the maximum 85% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the increased 'AAA' breakeven AP of 86%. The Stable Outlook on the covered bonds rating is underpinned by the Positive Outlook on CS.

The 'AAA' breakeven AP of 86% corresponds to a breakeven over-collateralisation (OC) of 16.3%. It is mainly driven by the cash flow valuation component (12%), due to the differences between the stressed present values of the programme's assets and liabilities. This is a result of the eight-year difference between the modelled WA life of the cover assets and the covered bonds and the fixed rate portion of the cover pool (25%), which contributes to a higher cash flow valuation component in an increasing interest rate stress scenario. Also driving the breakeven OC is a 'AAA' credit loss of 5.2%, reflecting an weighted average (WA) default rate of 19.6% and a 75% WA recovery rate for the cover pool. The third driver of the breakeven OC is an asset disposal loss component of 3.5%, underlining the need for forced asset liquidation to ensure timely payment of outstanding covered bonds post issuer default. Cash flows were modelled with an assumed annual prepayment rate of 3% in the worst case scenario.

As of 18 December 2015, the outstanding mortgage covered bonds of CHF9.8bn were secured by a cover pool of CHF15.2bn of residential mortgages secured on 28,375 Swiss properties.

All of the issued covered bonds are fixed-rate and denominated in foreign currencies (91.3% in EUR and 8.7% in USD). The guarantor hedges interest rate and foreign exchange risks between the cover assets and the covered bonds. CS acts as swap provider, subject to collateralisation and best-effort replacement triggers.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) CS's Issuer Default Rating (IDR) is downgraded by three or more notches to 'BBB' or below; or (ii) the sum of notches represented by the IDR uplift and the Discontinuity Cap is reduced by three or more notches; or (iii) the asset percentage (AP) that Fitch considers in its analysis increases above the 'AAA' breakeven level of 86.0%.

The Fitch breakeven AP 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 AP to maintain the covered bond rating cannot be assumed to remain stable over time.