OREANDA-NEWS. Fitch Ratings has assigned Aegon Bank N.V.'s (Aegon Bank; A-/Stable/F2) Series 01 covered bonds a final 'AAA' rating with a Stable Outlook. The fixed-rate EUR750m bond with a five-year maturity is the first issued under the conditional pass-through covered bond programme.

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 10% minimum overcollateralisation (OC), translating into an asset percentage (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. This provides more protection than the 95% breakeven AP for the 'AAA' rating. The 'AAA' breakeven AP supports a 'AA' rating on a probability of default (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 notches 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 '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 'AAA' breakeven AP also takes into account the interest rate risk arising from the unhedged nature of the programme and adjustments made for insurance set-off risk and commingling risk.

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.

The cash flow valuation reduces the 'AAA' breakeven OC by 6.5% due to the high excess spread available in the programme. The mostly fixed-rate loans (83%) in the cover pool carry a higher interest rate until their reset date (WA 17 years) than the fixed-rate coupon payable on the bond, which will remain fixed in case of switching to pass-through. The difference in interest rate between assets and liabilities is high enough to result in sufficient excess spread even in a high prepayment scenario for the stressed present value of the assets to be higher than the present value of the liabilities.

The 'AAA' breakeven OC is further driven by the asset disposal loss component (10.3%), reflecting (i) the negative carry calculated in a high prepayment scenario; and (ii) the cushion between the model output and the legal minimum overcollateralisation level of 5%.

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.