OREANDA-NEWS. Fitch Ratings has affirmed Commerzbank AG's (CBK, BBB/Positive/F2) SME structured covered bonds at 'AA' with a Stable Outlook, following a periodic review of the programme.

KEY RATING DRIVERS
The rating is based on CBK's Long-term Issuer Default Rating (IDR) of 'BBB', an unchanged Discontinuity Cap (D-Cap) of 8 (minimal) and the 16.5% contractual over-collateralisation (OC) that Fitch takes into account in its analysis.

The D-Cap analysis reflects the minimal risk of payment discontinuation on the covered bonds in case of insolvency of CBK. After CBK defaults, the covered bonds benefit from a switch to pass-through mechanism, if funds to repay the bonds at their expected maturity date are insufficient, and a separate liquidity facility for each covered bond.

The 'AA' breakeven OC has increased to 16.5% from 16% over the last 12 months. This is mainly due to a higher cash flow valuation component (5%), up from 1.6% in last year's analysis. This reflects primarily the programme's larger mismatches between fixed assets, accounting for 64.4% of the cover pool, and floating liabilities once the covered bonds have switched to pass-through.

The main constituent of the breakeven OC remains the credit loss component of 14.7%, down from 17.6% a year ago. Fitch's reduced credit loss expectation comes as a result of a more granular collateral pool and an improved economic environment with lower corporate insolvency expectations.

With a cut-off date 30 November 2015, CBK's EUR500m outstanding SME structured covered bonds were secured by a collateral pool of EUR955m, resulting in nominal OC of 91%. This OC consists of Fitch's 'AA' breakeven OC of 16.5%, the commingling, set-off, and related mortgages transfer reserves and additional OC buffer. The collateral pool consists of 2,589 short-term money market and medium-term investment loans granted to 1,882 German SME borrower groups.

The weighted average life (WAL) of the collateral pool has decreased to 1.2 years from 1.7 years over the last 12 months. However, Fitch has modelled all loans with an extended maturity to account for the increased default risk of short-term bullet loans should CBK be unwilling or unable to refinance maturing loans. The agency assumed a minimum WAL of two years for all loans, leading to a stressed portfolio WAL of 2.2 years.

RATING SENSITIVITIES
The 'AA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by 5 or more notches to 'B+' or lower; or (ii) OC that Fitch considers in its analysis drops below Fitch's 'AA' breakeven level of 16.5%; or (iii) the commingling and set-off risks are not appropriately mitigated.

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 covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the covered bonds 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.