OREANDA-NEWS. Fitch Ratings has affirmed Aareal Bank AG's (ARB, BBB+/Stable/F2) public sector Pfandbriefe at 'AAA' with a Stable Outlook, following a periodic review of the programme.

KEY RATING DRIVERS
The rating is based on ARB's Long-term Issuer Default Rating (IDR) of 'BBB+', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 5 (low risk) as well as the 16% over-collateralisation (OC) that Fitch takes into account, which provides more protection than the 15% 'AAA' breakeven OC.

The 'AAA' breakeven OC has increased to 15% from 14% over the last 12 months. The increase in the breakeven OC is mainly due to a modelling assumption change. In its current cash flow analysis Fitch tested the point at which recourse against the cover pool is enforced at up to six quarters after the pool cut-off date rather than up to four quarters previously. This leads to a slight increase of the programme's cash flow valuation component to 6.7% (6.6% a year ago) and of the programme's asset disposal loss component to 0.4% (0.2% last year).

The asset disposal loss component underlines a minimal need for forced asset sales to ensure timely payment of all outstanding Pfandbriefe post issuer default. It reflects the programme's well-matched asset and liability redemption profiles, as well as embedded call options on part of the programme's liabilities, which enhance the ability to manage existing mismatches.

The main constituent of the breakeven OC remains the credit loss component of 14%, up from 13.7% a year ago. Its elevated level is driven by the cover pool's high concentration, with 154 assets assigned to 25 final guarantors. The cover pool's obligors are located in seven different countries, with 80% of the cover assets being exposed to 'AAA' rated sovereigns and 6% to supranationals.

As of 18 January 2016, ARB's EUR2.151bn outstanding public sector Pfandbriefe were secured by a cover pool of EUR2.495bn, resulting in a nominal OC of 16%. All assets and Pfandbriefe are euro-denominated.

ARB's public sector Pfandbrief rating is credit-linked to Germany (AAA/Stable/F1+) as 77% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by three or more notches to 'BB+' or lower; or (ii) the combined number of notches represented by the IDR uplift and the D-Cap is reduced to 4 or lower; or; (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 15%; (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 sustain timely payment in scenario above the IDR adjusted by the IDR uplift, and would support recoveries given default commensurate with one further notch. As a result, the covered bond rating would likely be downgraded to 'A+'.

The Fitch breakeven OC for the covered bond rating will be affected by, among other factors, the profile of the cover assets relative to outstanding Pfandbriefe, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the Pfandbriefe rating cannot be assumed to remain stable over time.

More details on the portfolio and Fitch's analysis will be available in a credit update, which will shortly be available at www.fitchratings.com.