OREANDA-NEWS. Fitch Ratings has maintained DEPFA ACS Bank's (DEPFA, BBB/RWN/F2) EUR18.2bn-equivalent of outstanding asset-covered securities' (ACS) 'A-' rating on Rating Watch Negative (RWN).

KEY RATING DRIVERS
The covered bond rating is based on DEPFA's Long-term Issuer Default Rating (IDR) of 'BBB', an unchanged Discontinuity Cap (D-Cap) of 3 notches (moderate high risk), and the level of overcollateralisation (OC) between the covered bonds and the cover pool. Since DEPFA is in a wind-down mode, Fitch only takes into account the publicly committed level of OC of 5%, which is also equal to the 'A-' breakeven OC. This level allows for a two-notch recovery uplift above DEPFA's IDR of 'BBB'. The RWN on the bonds reflects that on DEPFA's IDR.

As of end-March 2015, the cover pool comprised 506 assets with a current balance of EUR18.2bn, which Fitch aggregated to 127 final guarantors. The pool is internationally diversified with concentrations in the US (27%), Germany (25%) and Spain (12%). The modelled obligor concentration is particularly high, with the top 20 guarantors accounting for more than 84% of the total portfolio. The largest guarantor exposures are to Germany (AAA/Stable/F1+) at 25% of the cover pool, followed by the US (AAA/Stable/F1+) at 14% and Spain (BBB+/Stable/F2) at 9%. Exposure to public sector entities located in countries with ratings below 'A-' remains the main source of risk.

The 'A-' breakeven OC for the programme is driven by the credit loss on the pool of 10.4% in a 'A-' rating scenario. There are some interest rate mismatches as floating assets versus floating bonds are 65% versus 49%, respectively, making the OC sensitive to an interest rate decrease. Maturity mismatches are small, with the weighted average life of the cover assets 6.3 years, compared with 6.6 years for the ACS. The cover assets and ACS are denominated in various currencies, but currency mismatches are largely mitigated by the use of cross-currency swaps.

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 small open foreign currency positions in four different currencies were stressed ranging from 1.2x to 3x the current exchange spot rate in a 'A-' scenario. These tested scenarios are not intended to conform to exact probabilities of occurrence and do not represent explicit forecasts but rather show the vulnerability of the covered bond programme to changes in foreign currency exchange rates. Overall, the sensitivity of the 'A-' breakeven OC to interest and currency stresses was found to be small.

RATING SENSITIVITIES
The 'A-' rating would be vulnerable to downgrade if any of the following occurs: (i) DEPFA's IDR is downgraded by one or more notches to 'BBB-' or below; (ii) the OC Fitch gives credit to drops below Fitch's 'A-' breakeven OC of 5%.

The Fitch breakeven OC for the ACS rating will be affected, among others, by the profile of the cover assets relative to outstanding ACS, which can change over time, even in the absence of new issuance. Therefore it cannot be assumed to remain stable over time.