Fitch Affirms Credito Emiliano OBG Programmes; Outlook Negative
The affirmation follows a periodic review of the programmes.
KEY RATING DRIVERS - CREDEM CB
The rating of the OBG, guaranteed by CREDEM CB, is based on CREDEM's Long-term IDR of 'BBB+', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 1 (very high risk) and the 71.6% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 80.5% 'A+' breakeven AP.
Overcollateralisation (OC) Components
Fitch has revised the breakeven AP for the 'A+' rating of the OBG guaranteed by CREDEM CB to 80.5% (corresponding to a breakeven overcollateralisation (OC) of 24.2%) from 79% (26.6% OC). This was mainly due to an improvement in the cash flow valuation component to 6.5% from 10.7%.
The high refinancing spreads for Italian residential mortgage loans (399bps at 'A+') and maturity mismatches drive the 14.7% asset disposal loss component, which is the greatest contributor to the breakeven AP. This is followed by the cash flow valuation component of 6.5%, whose improvement has led to a lower 'A+' breakeven OC due to open interest rate positions between assets and liabilities. The cover pool comprises fixed loans (18.5%), floating-rate loans (38.9%) and loans with switching options from fixed to floating or vice versa (42.6%), whereas all the OBG are fixed-rate and Fitch considers them floating in its cash flow analysis because they are hedged via a fixed to floating swap agreement entered with the issuer. In an increasing interest rate scenario, which drives the breakeven OC results, Fitch assumes that the optional loans would switch to fixed-rate, increasing the interest rate mismatches in the programme.
The cover pool's credit loss of 6.1% in a 'A+' scenario reflects a 'A+' weighted average (WA) frequency of foreclosure (WAFF) of 21.2% and a WA recovery rate (WARR) of 71.3%. The WAFF is driven by the presence in the cover pool of loans originated by CreaCasa (an origination channel fully owned by the issuer, which grants loans that could have a higher-risk profile than loans originated by the branch network) (15.5% of the cover pool) and of floating-rate loans granted in a low interest rate scenario (42.3%), whereas the WARR reflects an increased indexed WA current loan-to-value (CLTV (indexed)) of 53.2% compared with 49.5% previously.
For CREDEM CB's rating, which considers both uplift on a probability of default (PD) basis and for recoveries given default, the asset disposal loss component is in line with the rating scenario that is tested for timely payments (i.e. 'A-' tested rating on a PD basis), while the other breakeven OC components represent 'A+' stresses. Combined with Fitch's testing for at least 91% recoveries rather than 100% to assign two notches credit for recoveries given default, this is why the sum of the breakeven OC drivers is higher than 24.2%'s 'A+' breakeven OC.
D-Cap
Fitch revised the privileged derivatives component of its D-Cap assessment to 'moderate' from 'low', reflecting our latest view of the materiality of the fixed-to-floating swap and of an internal swap counterparty. The programme has liability interest rate swaps and CREDEM is the swap counterparty. Currently all outstanding covered bonds are fixed-rate versus 50% previously; the outstanding series are all hedged with the exception of one series where the swap notional is 70% of the nominal amount of the series. In Fitch's view the exposure of the covered bonds to the swaps provided by CREDEM is material as it hedges the incoming flows from the portfolio, which comprises 77% floating-rate assets (as of November 2014, including optional and modular loans, which are floating-rate).
The revised assessment on the privileged derivatives component does not affect the D-Cap of 1 (very high risk), because the weakest link of the D-Cap analysis remains the liquidity gap and systemic risk, which is considered very high risk. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch does not expect a successful sale of the assets to be achieved in a 12-month maturity extension of the liabilities, to make timely payments on the covered bonds.
Fitch takes into account the highest level of AP recorded by CREDEM CB during the preceding 12 months (71.6% as of March 2014), because the issuer is currently rated 'F2' and the programme is not in wind down or dormant.
KEY RATING DRIVERS - CANOSSA CB
The 'BBB+' rating of the OBG, guaranteed by CANOSSA CB, is based on CREDEM's Long-term IDR of 'BBB+', an unchanged IDR uplift of 0, and unchanged D-Cap of 1 (very high risk) and the contractual AP of 100% (no OC) that Fitch takes into account in its analysis, which is at the same level as Fitch's breakeven OC for the rating.
The 100% AP is not sufficient to sustain the rating of the OBG on a PD basis, even though the OBG would theoretically be rated one-notch above the 'BBB+' tested rating on a PD basis, with recovery prospects in a 'A-' rating scenario of at least 51%. However, certain rating triggers in the documentation, including the definition of eligible institution, limit the covered bonds rating to the 'BBB' rating category.
The 'BBB+' breakeven AP is 100% because the programme is considered to be dormant; the programme has only been used for market operations with the European Central Bank and the last issue took place in 2013. Furthermore, CREDEM does not expect further issuance from the programme in the short- to medium-term.
The rating reflects a 'BBB+' WAFF of 18.3% and a WARR of 71.3%. The WAFF is driven by the presence in the cover pool of loans originated by CreaCasa (37.8%), of constant instalment and variable maturity loans (31.3%), and of floating-rate loans granted in a low interest rate scenario (48.2%), whereas the WARR is driven by an indexed WA CLTV of 60.3%, higher than 47.6% previously.
D-Cap
The unchanged D-Cap of 1 is driven by what Fitch assesses as a weak liquidity gap and systemic risk component, as is the case for the CREDEM CB programme.
The unchanged IDR uplift of 0 for both programmes reflects the covered bonds' exemption from bail-in but also Fitch's view that Italy is not a covered bonds-intensive jurisdiction; that the issuer is not systemically important in its domestic market, and the lack of protection provided by unsecured debt, which is 0% of total adjusted assets.
RATING SENSITIVITIES
CREDEM CB
The 'A+' rating would be vulnerable to downgrade if any of the following occurs: (i) the issuer's Long-term IDR is downgraded by one or more notches to 'BBB' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 0; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'A+' breakeven level of 80.5%.
If the AP that Fitch considers in its analysis increases to the contractual limit of 93% the covered bond rating would likely be downgraded to 'A-'; this level of AP would not be sufficient to allow for timely payment on the OBG and limit the covered bond rating to one-notch above the IDR.
CANOSSA CB
The 'BBB+' rating would be vulnerable to downgrade if the issuer's Long-term IDR is downgraded by two or more notches to 'BBB-' or below.
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.
More details on the cover pool and Fitch's analysis will be available in a credit update report, which will shortly be available at www.fitchratings.com.
In the report Breaking Down Breakeven Overcollateralisation, published 8 July 2014, Fitch details its approach for determining the breakeven OC components.
Комментарии