OREANDA-NEWS. September 14, 2015. Fitch Ratings has assigned Volksbank Wien-Baden AG's (VBWB; 'BB+'/Positive) mortgage covered bonds (Fundierte Bankschuldverschreibungen, FBS) a 'BBB' rating with Positive Outlook.

KEY RATING DRIVERS
The 'BBB' rating is based on VBWB's Long-term Issuer Default Rating (IDR) of 'BB+', adjusted by an IDR uplift of one notch, and on the legal minimum overcollateralisation (OC) of 2%, which provides at least 51% recoveries on the covered bonds given default in a 'BBB' rating scenario. The latter allows for another notch uplift. The Positive Outlook on the mortgage covered bonds mirrors that on VBWB's Long-term IDR.

Fitch applied a limited rating uplift analysis as available performance information did not enable the agency to perform a full asset analysis. Fitch does not communicate a break-even OC level for the covered bond rating but tested whether, based on the OC that it takes into account in its analysis, recoveries in the respective rating scenario would be within the range corresponding to a one-notch uplift.

Fitch found that the minimum legal OC of 2% in combination with a weighted average asset default rate (WAFF) of up to 50% and a weighted average asset recovery rate (WARR) of 33% on the cover assets is sufficient to achieve a recovery rate on the defaulted covered bonds of at least 51%. These assumptions are considered as sufficiently remote to support the limited rating uplift of VBWB`s mortgage covered bonds.

Fitch assigned a D-Cap of two notches to the programme, with the liquidity gap and systemic risk - which the agency assesses as high - constituting the weakest link. The Austrian legislation on FBS does not contain any liquidity provisions, but the issuer contractually commits, via a contract available on its website, for the benefit of third parties to provide liquid funds covering at least interest and principal payments for 180 days. This, however, does not fully mitigate payment interruption risks as stressed asset sales are expected to take up to 12 months.

Fitch may lower its discontinuity risk assessment to as far as full discontinuity (D-Cap of 0 notches) to consider the termination of the contract without the consent of the bondholders. The contract will terminate if a covered bond rating of at least 'A-' can be achieved without this liquidity commitment or if the issuer's rating is at least 'BBB'.

RATING SENSITIVITIES
Given Fitch's application of the limited rating uplift approach, the rating of the covered bonds is directly linked to VBWB's rating. Changes to the bank`s IDR would be reflected immediately on the covered bonds rating.

If the data limitations are resolved, the D-Cap of two notches would enable the programme to be rated 'A-' based on the current IDR of 'BB+' provided that OC is sufficient to support that rating and considering the termination clauses. However, if the bank's IDR is upgraded in this scenario, a lowered D-Cap may limit any upgrade potential for the covered bonds above the IDR as adjusted by the IDR uplift.