OREANDA-NEWS. Fitch Ratings has affirmed Bayerische Landesbank's (BayernLB; A-/Stable/F2/bbb) public sector Pfandbriefe at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects BayernLB's Long-term Issuer Default Rating (IDR) of 'A-', the unchanged Discontinuity Cap (D-Cap) of 5 (low risk), an IDR uplift of 2 and the 39.5% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the 'AAA' breakeven OC of 13%.

BayernLB's 'AAA' breakeven OC has remained stable at 13% over the last 12 months. The main constituent continues to be the cash flow valuation component (10.3%), mainly driven by maturity mismatches. The weighted average (WA) life of the assets Fitch calculated based on legal final maturities and an annual 5% prepayment assumption corresponds to 7.2 years. This compares with a WA life of the bonds of 5.1 years.

The programme is sensitive to a low prepayment scenario, as liquidity is needed to redeem the shorter bonds. Fitch floored its prepayment assumptions at 5%, assuming that repayments at interest reset date are likely following an issuer default.

The low credit loss component (5.4%) reflects the large proportion of low-risk German assets in the cover pool. Therefore the programme's rating is credit-linked to Germany (AAA/Stable/F1+) as 48% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states. This component increased slightly from our previous analysis of 3.3%, mainly driven by the application of a 'BBB-' floor assumption for unrated German municipalities. In the previous analysis an individual score for single municipalities was applied instead.

Fitch expects significant changes in the pool composition in the course of 2015 as about 20% of the cover assets will mature. As these are mainly assets backed by a statutory guarantee of the German sovereign or its federal states, an increase of the credit loss component is expected in 2016, which is not yet considered in the breakeven OC of 13%.

The asset disposal loss component (slightly increased to 1.8%) is driven by maturity mismatches and underlines the need for forced asset sales to ensure timely payment of all outstanding Pfandbriefe post issuer default. However, the modelled price discounts on forced asset sales of German sovereign and municipal assets are moderate.

Fitch tested for adverse interest rate and currency movements in its cash flow analysis. For residual interest rate risk, Fitch applied its published interest rate stresses. The open foreign currency positions in four different currencies were stressed ranging from 1.4x to 3x the current exchange spot rate in a 'AAA' scenario. These tested scenarios are not intended to conform to exact probabilities of occurrence and do not represent explicit forecasts but rather show vulnerability of the covered bond programme to changes in foreign currency exchange rates.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded to 'BB+' or lower; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 3 or lower; or (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 13%; or (iv) the German sovereign is downgraded to 'AA+' or below.

If the OC that Fitch considers in its analysis drops to the legal minimum requirement of 2% on a net present value basis, it would not be sufficient to allow for timely payment of the Pfandbriefe following an issuer default. As a result, the Pfandbrief rating would likely be downgraded to 'AA-', reflecting an IDR uplift of two notches and a one-notch recovery uplift.

The Fitch breakeven OC 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 OC to maintain the covered bond rating cannot be assumed to remain stable over time.