Fitch Ratings has affirmed Berlin Hyp AG's (Berlin Hyp, A+/Stable/F1+) outstanding EUR3.1bn public sector Pfandbriefe at 'AA+'. The Outlook is Stable.

KEY RATING DRIVERS

The rating is based on Berlin Hyp's Long-Term Issuer Default Rating (IDR) of 'A+' and an unchanged IDR uplift of '2'. This results in a floor rating of the Pfandbriefe on a probability of default (PD) basis of 'AA', irrespective of the over-collateralisation (OC) available to the covered bonds. The programme's Discontinuity-Cap (D-Cap) remains unchanged at 4 (moderate).

Fitch deems this programme dormant and, in the absence of a public OC statement, relies on the legal minimum OC, which is the higher of 0% on a nominal basis and 2% on a stressed net present value basis. This level of OC allows for a one-notch uplift to 'AA+' due to recoveries in the range of 51% to 91% should the covered bonds default. The Stable Outlook on the public sector Pfandbriefe reflects that on Berlin Hyp's and the German sovereign`s IDR (AAA/Stable/F1+).

The programme's rating is credit-linked to Germany as 87% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states. While this is lower than a year ago, when it was at 93%, it still represents a significant exposure towards Germany.

In a 'AA+' scenario, Fitch calculated a stressed credit loss of 3.1%, which is larger than 1.4% in the previous analysis. The stressed defaults and recoveries are 3.7% (up from 1.4%) and 16.2% (down from 21.4%), respectively. In this scenario, the Federal Republic of Germany is not assumed to default. The larger credit losses are a result of the reduction in German assets in favour of lower-rated assets from Poland, Canada and Lithuania.

RATING SENSITIVITIES

The legal minimum over-collateralisation level of 0% is unlikely to be sufficient for maintaining the 'AA+' rating of the Pfandbriefe, should Berlin Hyp`s IDR be downgraded or the IDR uplift be revised below 2. The rating of the covered bonds would also be vulnerable to downgrade if Germany is downgraded below 'AA+'.

Since the rating is based on recoveries only, changes to the D-cap assessment for the programme would have no impact on the covered bond programme's rating, assuming all other factors remain unchanged.