EUR500 million of notes affected
Frankfurt am Main, December 06, 2012 -- Moody's Investors Service has today assigned a provisional (P)Aa2 long-term rating to the SME structured covered bonds to be issued by Commerzbank AG (A3 deposits, negative; BFSR D+/BCA baa3, Prime-2). The bonds are not governed by the German Pfandbrief Act, but structured on a contractual basis.
A covered bond benefits from (1) the issuer's promise to pay interest and principal on the bonds; and (2) if the issuer defaults, the economic benefit of a collateral pool (the cover pool). The ratings therefore take into account the following factors:
(1) The credit strength of Commerzbank (A3/Prime-2).
(2) The value of the cover pool in the event of issuer default. The stressed level of losses modelled in event of issuer default (cover pool losses) for this transaction is 24.2%.
The analysis of the value of the cover pool considered:
a) The credit quality of the assets backing the covered bonds. The cover pool consists of loan receivables of SME and corporate borrowers. The collateral score for the cover pool is 21% and is based on the characteristics of the provisional cover pool as well as the eligibility criteria that will be applied for future additions to the cover pool.
b) The structure of the programme. Notable aspects of the structure include (i) the switch to pass-through repayment of the bonds by the guarantor if Commerzbank fail to make payments under the covered bonds; (ii) a liquidity commitment by Commerzbank if it is downgraded below Prime-2; and (iii) a reserve that will be provided to limit the impact of set-off risk and commingling risk, if Commerzbank is downgraded below Prime-2.
c) The exposure to market risk. The market risk for the cover pool is 10.1%.
d) The over-collateralisation (OC) in the provisional cover pool will be 30%, of which Commerzbank provides 11% on a "committed" basis (see Key Rating Assumptions/Factors, below).
The TPI assigned to this transaction is "Probable". Moody's TPI framework does not constrain the rating. As of 31 October 2012, the total value of the assets included in the cover pool is approximately EUR650 million, comprising loans to 486 debtor groups.
The provisional rating assigned by Moody's addresses the expected loss posed to investors. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.
Moody's issues provisional ratings in advance of the final sale of securities and these ratings only represent Moody's preliminary opinion. Upon a conclusive review of the transaction and associated documentation Moody's will endeavour to assign a definitive rating to the covered bonds.
KEY RATING ASSUMPTIONS/FACTORS
Covered bond ratings are determined after applying a two-step process: an expected loss analysis and a TPI framework analysis.
EXPECTED LOSS: Moody's determines a rating based on the expected loss on the bond. The primary model used is Moody's Covered Bond Model (COBOL), which determines expected loss as (1) a function of the issuer's probability of default (measured by the issuer's rating); and (2) the stressed losses on the cover pool assets following issuer default.
The cover pool losses for this programme are 24.2%. This is an estimate of the losses Moody's currently models in respect of the provisional cover pool if Commerzbank defaults. Cover pool losses can be split between market risk of 10.1% and collateral risk of 14.1%. Market risk measures losses as a result of refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks). Currently, there exist no currency mismatches between the provisional asset pools and liabilities in this programme. Collateral risk measures losses resulting directly from the credit quality of the assets in the cover pool. Collateral risk is derived from the collateral score, which for this programme is currently 21%.
The OC in the provisional cover pool is 30%, of which Commerzbank provides 11% on a "committed" basis. The minimum OC level that is consistent with the (P)Aa2 rating target is 11%, of which 11% should be provided in a "committed" form (numbers in nominal value terms). These numbers show that Moody's is not relying on "uncommitted" OC in its expected loss analysis.
For further details on cover pool losses, collateral risk, market risk, collateral score and TPI Leeway across covered bond programmes rated by Moody's please refer to "Moody's EMEA Covered Bonds Monitoring Overview", published quarterly.
TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI), which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI framework is to limit the covered bond rating to a certain number of notches above the issuer's rating.
The robustness of a covered bond rating largely depends on the issuer's credit strength.
The TPI Leeway measures the number of notches by which the issuer's rating may be downgraded before the covered bonds are downgraded under the TPI framework.
Based on the current TPI of Probable, the TPI Leeway for this programme is two notches, meaning the covered bonds might be downgraded as a result of a TPI cap once the issuer rating is downgraded below Baa2, all other variables being equal.
A multiple-notch downgrade of the covered bonds might occur in certain limited circumstances, such as (1) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (2) a multiple-notch downgrade of the issuer; or (3) a material reduction of the value of the cover pool.
The principal methodology used in this rating was "Moody's Approach to Rating Covered Bonds" published in July 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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