OREANDA-NEWS. Fitch Ratings has assigned Aegon Bank N.V.'s (Aegon Bank; A-/Stable/F2) Series 01 covered bonds a 'AAA(EXP)' rating with a Stable Outlook. The fixed-rate bond is the first to be issued under the conditional pass-through covered bond programme. The expected rating is based on an assumed minimum benchmark size of EUR500m with a seven-year maturity.

The assignment of the final rating is contingent on the receipt of final documents conforming to information already reviewed.

KEY RATING DRIVERS
The rating is based on Aegon Bank's Long-term Issuer Default Rating (IDR) of 'A-', a Discontinuity Cap (D-Cap) of 8 (minimal discontinuity) and the level of overcollateralisation (OC) that Fitch takes into account in its analysis. The breakeven asset percentage (AP) for the 'AAA' rating is 95%. Fitch gives credit to the 10% committed OC, translating into an AP of 91%, which is part of the programme's ACT calculation and is more conservative than the AP of 93% that will be published in the programme's monthly investor report. The 'AAA' breakeven AP supports a 'AA' rating on a PD basis and allows for a two-notch recovery uplift for the covered bonds in a 'AAA' scenario.

The D-Cap of 8 is driven by the minimal discontinuity assessment of the liquidity gap and systemic risk component. This is due to the pass-through feature and the six-month interest reserve including senior costs in place for the bonds. The agency believes that none of the other D-Cap components compromise the overall minimal discontinuity assessment for the programme. Since the programme has been registered with the Dutch central bank, Fitch expects the covered bonds to be exempt from bail-in. The IDR uplift is zero notch because Fitch does not consider Aegon Bank a systematically important bank for its domestic market, and senior unsecured debt accounts for less than 5% of its adjusted balance sheet.

The 95% 'AAA' breakeven AP factors in a hypothetical issuance of an at least EUR500m bond with a seven-year term in anticipation of the first benchmark issuance from the programme, which will be secured by a EUR904m cover pool of prime Dutch residential mortgage loans. The 'AAA' breakeven AP also takes into account the unhedged nature of the programme and adjustments made for insurance set-off risk and commingling risk.

The 'AAA' breakeven AP is equivalent to a breakeven OC of 5% and corresponds to the legal minimum OC under the Dutch covered bonds law. The 'AAA' credit loss of 2.2% reflects the impact of the weighted average (WA) default rate of 11.10% and the WA recovery rate of 80.39% in a 'AAA' scenario.

The 2.2% 'AAA' credit loss is the lowest among peers due to a low WA default, driven by a comparatively low share of interest-only loans and a low WA debt-to-income ratio, and a high WA recovery rate, due to a large portion of NHG loans (69%) and the small share of loans secured by illiquid properties.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by five or more notches to 'BB' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to three or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 95.0%.

The Fitch breakeven AP 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 AP to maintain the covered bond rating cannot be assumed to remain stable over time.