OREANDA-NEWS. Fitch Ratings has affirmed Aareal Bank's (Aareal; BBB+/Stable/F2) outstanding mortgage and public sector covered bonds and COREALCREDIT's mortgage covered bonds at 'AAA' with Stable Outlook. This follows the transfer of all outstanding mortgage and public sector covered bonds and cover pools of COREALCREDIT BANK AG to Aareal's respective covered bond programmes.

KEY RATING DRIVERS

The actions follow the legal completion of the integration of COREALCREDIT's operative banking business, including the covered bond programmes, into Aareal's and our withdrawal of COREALCREDIT's Issuer Default Rating (IDR, see "Fitch Affirms COREALCREDIT at 'BBB+'; Withdraws Ratings", published on 16 June 2015 at www.fitchratings.com).

The integration, which took place on 15 June 2015, led to an immediate merger between Aareal's and COREALCREDIT's both mortgage and public sector Pfandbrief programmes. As a result COREALCREDIT's and Aareal's outstanding Pfandbriefe of the respective programme now rank pari passu and are secured jointly by one cover pool.

The rating of Aareal's mortgage Pfandbriefe is based on Aareal's Long-term IDR of 'BBB+', an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk), an IDR uplift of 2 and a breakeven over-collateralisation (OC) of 24%.

At 15 June 2015 the combined OC for the merged mortgage programmes stood at 30.2%, as the outstanding mortgage Pfandbriefe of now EUR12bn were secured by cover assets of EUR15.7bn.

The main driver of Fitch's 'AAA' mortgage Pfandbriefe breakeven OC is stressed credit loss. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 91.1% and a weighted average recovery rate of 71.8%, resulting in a weighted average credit loss of 25.7% which is lower compared with Fitch-calculated losses of Aareal's mortgage cover pool before the merger.

The lower credit loss for the merged mortgage portfolio is driven by the credit quality of COREALCREDIT's cover pool, which makes up for about 12% of the combined pool and comprises solely German exposure, which Fitch generally associates with smaller loss expectations.

In April 2015 COREALCREDIT`s mortgage Pfandbriefe were put on Rating Watch Positive upon announcement of the planned merger. However following the implementation of Fitch's Criteria for the Analysis of Commercial Real Estate Loans Securing Covered Bonds COREALCREDIT`s mortgage covered bonds were upgraded to 'AAA' and accordingly the Outlook was put on Stable following the review (see "Fitch Upgrades COREALCREDIT's Mortgage Pfandbriefe to 'AAA'; Outlook Stable", published on 13 May 2015 at www.fitchratings.com).

The rating of Aareal's public sector Pfandbriefe is based on its IDR of ' BBB+', an unchanged D-Cap of 5 (low risk), an IDR uplift of 2 and the breakeven OC of 14%.

At 15 June 2015 the combined OC for the merged public sector programmes stood at 18%, as the outstanding public sector Pfandbriefe of now EUR2.3bn were secured by cover assets of EUR2.7bn.

The main driver of Fitch's 'AAA' public sector Pfandbriefe breakeven OC remains the credit loss component of 13.7%, which is stable. Its level is driven by the cover pool's high concentration and exposure to lower-rated peripheral municipal and sovereign entities.

RATING SENSITIVITIES

In terms of sensitivity of the mortgage Pfandbriefe rating, the 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by two notches or more to 'BBB-' or lower; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 4 or lower; or (iii) the OC that Fitch considers in its analysis drops below our 'AAA' breakeven level of 24%.

In terms of sensitivity of the public sector covered bonds' rating, the 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by three notches or more to 'BB+' or lower; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 4 or lower; or (iii) the OC that Fitch considers in its analysis drops below our 'AAA' breakeven level of 14%.

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.