OREANDA-NEWS. November 10, 2015. Fitch Ratings has affirmed Unicredit Bank AG's (HVB; A-/Negative/F2/a-) outstanding public sector Pfandbriefe at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects HVB's Long-term Issuer Default Rating (IDR) of 'A-', the unchanged Discontinuity Cap (D-Cap) of 5 notches (low risk), an IDR uplift of 2 notches and the 37.5% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the 'AAA' breakeven OC of 15.5%.

The Outlook is Stable despite the Negative Outlook on HVB's IDR, which reflects the combined buffer represented by 5 notches of D-Cap and 2 notches of IDR Uplift, sufficient to compensate the potential one-notch downgrade (see 'Fitch Downgrades Unicredit Bank AG to 'A-/F2' on Support Revision; Outlook Negative', dated 19 May 2015 at www.fitchratings.com for further details).

HVB's 'AAA' breakeven OC has increased to 15.5% from 11%, previously, mainly driven by an increased cash flow valuation component of 10.1% (7% previously). This increase exhibits the programme's vulnerability to excess spread lost in a stressed scenario. As the weighted average life (WAL) of the Pfandbriefe exceeds the assets' WAL until the interest reset date, the excess spread is compressed if interest rates are reset in a low interest rate environment. Currently, Fitch does not receive loan-by-loan information on the interest reset date, but based its analysis on the average interest reset date stemming from the provided cash flow data.

The credit loss has increased to 5.9% from 3.7%, reflecting a different modelling approach for unrated German municipalities: in the current analysis Fitch applied a 'BBB-'floor for the majority of unrated German municipal assets, which account for about 55% of the cover pool. In the previous analysis, an individual score for single municipalities was applied.

The public sector Pfandbrief rating is credit-linked to Germany (AAA/Stable/F1+) as around 42% of the cover assets are either directly exposed or guaranteed by the German sovereign or its federal states.

The asset disposal loss component has risen slightly to 1.6% from 1.5%, but remains low. This component 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 floored its annual prepayment assumption at 3%, assuming that the prolongation rate provided by the issuer would not change significantly following an issuer default. This mirrors the possibility of the alternative manager to actively influence the borrower's repayment behaviour at the interest reset date.

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 15.5%; 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 single-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.