OREANDA-NEWS. Fitch Ratings says the recent downgrade of Commerzbank AG's Issuer Default Rating (IDR, CBK, BBB/Positive/F2) (see "Fitch Downgrades Commerzbank to 'BBB' on Support Revision; Outlook Positive" dated 19 May 2015 at www.fitchratings.com) will not affect the rating (AA/Stable) of the bank's SME structured covered bonds programme. This is because Fitch expects the bank to take remedial actions after the downgrade caused a breach of triggers for the programme.

As a result of the downgrade of CBK's rating below 'A-', CBK is no longer eligible to act as the account bank. An amendment agreement is therefore to be signed by all parties with an 'AA-' and 'F1+' rated bank to take over as the account bank.

CBK is also no longer eligible to be the liquidity facility provider as the latter has to have a rating of at least 'A-'and 'F2' or an unconditional and irrevocable guarantee of a party with a rating of at least 'A-' and 'F2'. Alternatively the full undrawn liquidity commitment has to be placed on an account of the guarantor. Commerzbank will post the committed amount, defined as all interest payments and senior expenses that are payable within the next three months after the calculation date (but at least the next interest payment if such payment is due beyond the three-month horizon), to the new account bank shortly.

In addition, commingling reserve, set-off risk reserve, and related mortgages transfer reserve have to be posted following the downgrade of CBK's IDR below 'A-'. As the required reserve amounts will be posted in the form of additional assets, these amounts are increased to account for the fact that these additional assets would also be exposed to commingling, set-off and credit risks.

The asset volume needed to additionally cover these risks as well as the reserve required amounts were calculated taking into account the interrelations between these risks, as in Fitch's view amounts lost due to commingling could not be set-off or default anymore.

The guarantor will purchase additional receivables to cover the reserve requirements on 14 July 2015, which is the earliest possible date due to technical reasons.

As a result the cover pool amount will increase to EUR955mn resulting in an overcollateralization (OC) of 91%. The OC consists of Fitch's 'AA' breakeven OC of 16%, 74% OC covering the commingling and set-off risks, and around 1% OC representing the related mortgages transfer reserve and additional OC buffer.

CBK's SME structured covered bonds rating is based on its Long-term IDR of 'BBB', a Discontinuity Cap of 8 (minimal risk) and the 16% 'AA' breakeven OC.