OREANDA-NEWS. Fitch Ratings has placed COREALCREDIT BANK AG's (COREALCREDIT; BBB+/Stable/F2) mortgage Pfandbriefe 'AA' rating on Rating Watch Positive (RWP).

The rating action follows Aareal Bank AG's (Aareal, A-/Negative/F1) announcement to integrate COREALCREDIT's operative banking business, including the covered bond programmes, into Aareal. The integration, which is scheduled to be legally completed by the end of 1H15, will lead to an immediate merger between Aareal's and COREALCREDIT's mortgage Pfandbrief programmes as well as between Aareal's and COREALCREDIT's public sector Pfandbrief programmes.

Fitch does not expect any rating impact on the 'AAA' rating of Aareal's mortgage and public sector Pfandbriefe from the planned merger. Fitch does not rate COREALCREDIT's public sector Pfandbriefe.

KEY RATING DRIVERS

The RWP on COREALCREDIT's mortgage Pfandbriefe reflects the rating upgrade potential following the merger of the two mortgage Pfandbrief programmes. Upon completion of the merger, COREALCREDIT's and Aareal's outstanding mortgage Pfandbriefe will be secured jointly by one cover pool.

The RWP will be resolved following the completion of the announced integration.

Once COREALCREDIT's mortgage Pfandbriefe become part of Aareal's mortgage Pfandbrief programme, they will be rated at the same level as the existing Aareal's mortgage Pfandbriefe. Fitch will subsequently withdraw COREALCREDIT's mortgage Pfandbrief rating.

The merger of COREALCREDIT's and Aareal's mortgage and public sector Pfandbrief programme respectively has no rating impact on Aareal's 'AAA'-rated mortgage and public sector Pfandbriefe. This is based on the agency's expectation of stable pool compositions and post-merger over-collateralisation (OC) levels at least being equal to the average of the pre-merger OC of the predecessor programmes.

It also reflects Fitch's expectation that the integration will be a smooth process from an IT point of view and will not result in a worsening of the cover pool specific alternative management component section in Fitch's Discontinuity Cap assessment of moderate risk for the mortgage Pfandbriefe and low risk for the public sector Pfandbriefe. As Aareal has already started to integrate COREALCREDIT in its IT systems, it is assumed that at the time of the merger or shortly afterwards both programmes would deploy Aareal's IT structure.

As of December 2014 the combined OC for the merged mortgage programmes would stand at 24.3%, which is above Fitch's current 'AAA' breakeven OC of 23.5% for Aareal's mortgage Pfandbriefe. The combined OC for the merged public sector programmes would stand at 15.2%, which is above Fitch's current 'AAA' breakeven OC of 14% for Aareal's public sector Pfandbriefe.

Fitch has not conducted a combined cash flow analysis of the pools as merged cash flow data is not yet available. However, the agency does not expect the 'AAA' breakeven OC for the merged programmes to materially differ from Aareal's mortgage and public sector programmes' respective levels.

For the mortgage programmes, credit loss is the main driver of the breakeven OC as both mortgage cover pools solely comprise commercial real estate loans. Although the profile of the cover pools is different, Fitch does not expect the 'AAA' credit loss of the merged pool to widen. Aareal's mortgage cover pool is internationally diversified with significant exposures to countries such as Italy, Poland and Spain. COREALCREDIT's cover pool, which will make up for about 15% of the combined pool, comprises solely German exposure, which Fitch generally associates with smaller loss expectations.

COREALCREDIT`s public sector cover assets will supply roughly 11% of the merged pool. Both public sector pools are closely linked to the German sovereign and its federal states (roughly 75% of the combined pool) with the remainder being internationally diversified public sector debt. The merger of the pools would lead to an increase in Spanish and Italian exposure compared with Aareal's current pool, indicating a potential for larger credit loss. Nevertheless, Fitch assumes the higher nominal OC of the merged programmes to compensate for this.

The assessment is based on December 2014 publicly available data for all programmes and on the results of the last full review of Aareal's Pfandbrief programmes and COREALCREDIT's mortgage Pfandbrief programme.

As of end-December 2014 COREALCREDIT's outstanding mortgage Pfandbriefe amounted to EUR2bn with an OC of 18.8%. Aareal's outstanding mortgage Pfandbriefe amounted to EUR10.8bn with an OC of 25.3%.

As of end-December 2014 COREALCREDITs outstanding public sector Pfandbriefe amounted to EUR0.2bn with an OC of 27.2%. As of end-December 2014 Aareal`s outstanding public sector Pfandbriefe amounted to EUR2.1bn with an OC of 14%.

The rating action does not reflect the implementation of Fitch's updated "Criteria for the Analysis of Commercial Real Estate Loans Securing Covered Bonds", the impact of which is currently being reviewed and will be finalised within the next weeks.

RATING SENSITIVITIES

COREALCREDIT's mortgage Pfandbriefe could be upgraded by two notches to 'AAA' when the mortgage cover pools of the two entities are legally merged.

The Fitch breakeven OC for the covered bond ratings will be affected by, among other factors, the profile of the cover assets relative to outstanding Pfandbriefe, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the Pfandbriefe ratings cannot be assumed to remain stable over time.