Fitch Upgrades DZ Briefe to 'AA '; Stable Outlook
KEY RATING DRIVERS
The rating action follows the upgrade of DZ Bank's Long-term Issuer Default Rating (IDR) to 'AA-'/Stable from 'A+'/Stable on 24 March 2015 (see 'Fitch Upgrades German Cooperative Banks and DZ BANK to 'AA-'/Outlook Stable' on www.fitchratings.com for further details).
DZ Bank's IDR upgrade triggers an immediate upgrade of the covered bond rating as the latter is based on the floor for the covered bonds' rating on a probability of default basis (PD) constituting DZ Bank's Long-term Issuer Default Rating (IDR) of 'AA-' adjusted by an unchanged IDR uplift of 2. This results in a 'AA+' rating for the DZ Briefe irrespective of the actual overcollateralisation (OC) available to the covered bonds.
No recovery uplift above 'AA+' is assigned as Fitch believes there is high uncertainty in assessing recoveries from the cover pool in a scenario where the cooperative banks, to which the pool is significantly exposed, enter into severe difficulties and where the group is restructured. This risk is also reflected in the programme's Discontinuity-Cap (D-Cap) of 0 (full discontinuity).
The Stable Outlook for the covered bonds rating is due to the Stable Outlook on DZ Bank's rating.
The IDR uplift of 2 reflects the covered bonds exemption from bail-in. Fitch classified Germany as a covered bonds-intensive jurisdiction. DZ Bank is viewed as a large and complex financial institution highly interconnected with Germany's economy. Plus there is additional protection provided by senior unsecured debt, representing more than 5% of the adjusted balance sheet, which could be bailed in.
Fitch believes that in a resolution scenario DZ Bank would be able to meet ongoing covered bond payments without interruption up to a 'AA+' scenario. However, in scenarios higher than 'AA+', Fitch considers there is a high likelihood of payment interruption, reflected in a D- Cap of '0', and cannot rule out the possibility of recoveries being below 51%. Therefore, Fitch does not rely on any level of OC above the legal minimum.
DZ Bank's cover pool is substantially exposed to the German cooperative banking group Genossenschaftliche FinanzGruppe (GFG, A+/Stable/F1+) of which DZ Bank is also a member. Fitch recognises the strong cohesion and mutual support within GFG. However, due to this cohesion and mutual support, the agency deems the whole sector as highly correlated, especially in periods of financial stress. The write-downs of the cooperative banks' equity in DZ Bank and potentially bailed in or defaulted senior debt held within the GFG would likely lead to a deterioration of the overall credit quality in the sector, increasing uncertainty to a level where it is not possible to conduct a robust recovery analysis.
RATING SENSITIVITIES
The 'AA+' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by one or more notches to 'A+' or below; or (ii) the number of notches represented by the IDR uplift is reduced to one or lower.
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