DBRS Ratings Limited (DBRS) confirmed its AAA rating on the outstanding series issued under the Deutsche Bank AG (DB AG or the Issuer) Conditional Pass-Through Structured Covered Bonds Programme (CPT SCB or the Programme). The Programme is guaranteed by SCB Alpspitze UG. The confirmation follows the completion of a full review of the Programme.
At the same time, DBRS discontinued its rating of Series 1 (CB1 - XS1523191697), which was redeemed early on 28 December 2017.
There is one series outstanding under the Programme: Series 2 (CB2 - XS1532501464) with a nominal amount of EUR 0.5 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, one notch below the Long-Term Critical Obligations Rating (COR) of Deutsche Bank AG. Deutsche Bank AG is the Reference Entity (RE) for the programme. Deviating from the “Rating European Covered Bonds” methodology, DBRS assigned a CBAP that is one notch below the COR even if the Programme can be seen as strategic for the funding of the primary activity of the RE.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (high), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA (high).
-- A one-notch uplift for good recovery prospects.
-- A committed minimum overcollateralisation (OC) of 16%. DBRS gives full credit to such commitment in accordance with its “Rating European Covered Bonds” methodology. Such level is not subject to a haircut, as DBRS considers it to be persistent based on historically observed levels.
The transaction was analysed with the DBRS European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and foreign currency stresses. In accordance with the “Rating European Covered Bonds” methodology, no forced asset liquidation was assumed for this transaction, given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios, ranging between a 1% and 20% Prepayment Rate.
Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the Covered Bonds (CB) ratings by one-notch. In addition, all else unchanged, the ratings of the CB would be downgraded if any of the following occurred: (1) the CPCA was downgraded below A (high); (2) the LSF assessment associated with the Programme was downgraded; (3) the quality of the cover pool (CP) and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects; (4) the assumed concentration of commercial real estate (CRE) loans and foreign currency exposure of the cover pool were to change adversely.
As of 30 September 2018, the aggregated outstanding balance of the CP underlying the Issuer’s CB was EUR 2.87 billion and composed entirely of retail loans. The total amount of liabilities outstanding was EUR 0.50 billion, yielding a current OC ratio of 475%. The Issuer has publicly committed to maintain an OC level of 16.0%.
As at September 2018, the CP comprised 32,014 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 76.7% and a WA seasoning of 83 months. Geographically, the pool is mainly distributed in the German regions of North Rhine-Westphalia (31.5% by outstanding balance), Baden-Württemberg (10.6%) and Bavaria (10.4%). Almost all (roughly 98%) of the retail pool yields a fixed coupon and 86% is fully amortising.
As the issuer could add CRE loans to the CP, DBRS included additional stressed assumptions in its asset and cash flow analysis, yielding more conservative results compared to a CP comprising only residential mortgage loans. DBRS assumed a CP split of approximately 7% CRE and 93% retail loans. DBRS further assumed that approximately 84% of the CRE pool would be denominated in GBP and consequently incorporated currency devaluation stresses in its analysis, up to 50% in a AAA stress scenario.
Upon the Issuer’s COR being downgraded below “A”, a swap reserve is put in place for an amount sufficient to cover the mark to market of a fixed-floating swap to cover the mismatch between the CP of mostly fixed-rate loans and the CB, which are entirely floating rate indexed to one-month Euribor, and a swap counterparty is appointed post-guarantee event. DBRS has given a high but not full value to such a swap in its analysis. The theoretical swap yields 75 basis points (bps) above Euribor, whereas the CB pay 50 bps above Euribor.
The DBRS-calculated WA life of the mortgage assets is roughly ten years based on a 0% prepayment rate, which is longer than the 2.1 years of WA life on the CB, not accounting for any maturity extension. This is mitigated by the conditional pass-through nature of the CB.
DBRS has assessed the LSF related to the Programme as “Very Strong” according to its rating methodology. For more information, please refer to DB AG SCB Rating Report published on: http://www.dbrs.com/research/303340/deutsche-bank-a-g-conditional-pass-through-structured-covered-bonds-structured-mortgages-rating-report.pdf.
For further information on the Programme, please refer to the rating report at www.dbrs.com.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating European Covered Bonds.”
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings include investor reports, stratification tables and loan-by-loan data on the CP and historical default performance data provided by the Issuer.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial ratings, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 23 November 2017, when DBRS confirmed its AAA ratings on the Series outstanding under the Programme.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Roger Bickert, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 November 2016
DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating Sovereign Governments
-- Rating CLOs and CDOs of Large Corporate Credit
-- European CMBS Rating Methodology
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.