OREANDA-NEWS. December 23, 2015. Fitch Ratings has affirmed Unicredit Bank AG's (HVB; A-/Negative/F2/a-) outstanding mortgage Pfandbriefe at 'AAA'. The Outlook is Stable. The affirmation follows an interim review of the programme as the issuer has provided Fitch with more detailed loan-by-loan data.

KEY RATING DRIVERS
The rating is based on HVB's Long-term Issuer Default Rating (IDR) of 'A-', the unchanged IDR uplift of 2 notches and Discontinuity Cap (D-Cap) of 3 (moderate high risk) as well as the 49.6% over-collateralisation (OC) that Fitch takes into account, which provides more protection than the 23% 'AAA' breakeven OC. The Outlook is Stable despite the Negative Outlook on HVB's IDR, as a potential one-notch downgrade of the IDR to the 'BBB+' IDR of HVB's ultimate parent (UniCredit SpA) would not result in a downgrade of the covered bonds.

The main contributor to the breakeven OC for the rating remains the credit loss component at 21.6% (down from 26%). For the total cover pool, the updated weighted average (WA) default rate is 50.7% and the WA recovery rate is 65% in a 'AAA' scenario. This is based on the delivery of individual property value information for a larger proportion of the cover pool, which enabled the agency to give credit to lower current loan-to-values than the percentage previously derived from the maximum 60% mortgage lending value limit eligible to funding via Pfandbriefe.

The cash flow valuation component of 7.5% reflects the negative cumulative excess spread generated by the programme. In a high stressed prepayment assumption, which is the overall worst case scenario for this programme, the assets' WA calculated life until final maturity of 9.2 years is reduced to 3.7 years. This compares with a longer WA life of the covered bonds, of 5.8 years. In this scenario, the programme generates sufficient cash, leading to a low asset disposal loss component of 0.9%. Fitch also tested a low prepayment scenario above 0%, reflecting the special administrators' options to actively influence full redemption at the loans' interest reset date.

As of September 2015 HVB's EUR16.3bn outstanding mortgage Pfandbriefe were secured by a cover pool of EUR24.4bn cover assets. All cover assets and mortgage Pfandbriefe are euro-denominated. Almost all financed properties are located in Germany.

Fitch classified around 46% of the cover assets as residential mortgage loans (excluding commercial multifamily), 28% as loans to real estate investment companies and 26% as loans to operating companies corresponding to financings secured by properties worth less than EUR10m. The commercial sub-portfolio consists of 42% multifamily properties, 33% office, 20% retail and 7% industrial properties.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) Unicredit Bank AG's Issuer Default Rating (IDR) is downgraded by two notches or more to 'BBB' or lower; or (ii) the combined number of notches represented by the IDR uplift and Fitch Discontinuity Cap is reduced to 3 or lower; or (iii) the overcollateralisation (OC) that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 23%.

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 sustain timely payment in scenario above the IDR adjusted by the IDR uplift, and would support recoveries given default commensurate with a 1 further notch. As a result, the covered bond rating would likely be downgraded to 'AA-'.

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.