DBRS Ratings Limited (DBRS Morningstar) assigned a provisional rating of AA to the notes expected to be 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 and is EUR 35 billion in size.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, one notch below Deutsche Bank AG’s Long-Term Critical Obligations Rating (COR). DB AG is the Reference Entity (RE) for the programme. Deviating from the “Rating European Covered Bonds” methodology, DBRS Morningstar assigned a CBAP that is one notch below the COR even if the Programme can be seen as strategic for the funding of the RE’s primary activity.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB, which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-Implied Likelihood (LSF-L) of AA (low).
-- A one-notch uplift for good recovery prospects.
-- A committed minimum overcollateralisation (OC) of 15%. DBRS Morningstar gives full credit to such commitment in accordance with its “Rating and Monitoring Covered Bonds” methodology.
The transaction was analysed with the DBRS Morningstar European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses.
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 CB ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB; (2) the LSF Assessment associated with the Programme was downgraded to Average or below; or (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.
The CB are unsubordinated obligations of DB AG and will rank pari passu among themselves and pari passu with all other unsubordinated obligations of the Issuer. SCB Alpspitze UG, the special-purpose vehicle Guarantor, has given an unconditional and irrevocable guarantee for the payments of principal and interest on the CBs. Payments under the guarantee are secured over a pool of mortgage loans (and related collateral) that have been and will be transferred to the Guarantor by the Sellers. DB AG, Deutsche Bank Privat- und Firmenkunden AG (DB PFK) and BHW Bausparkasse AG (BHW) act as Sellers and Servicers within the Programme. Loans and related collateral transferred to the Guarantor are registered in the Refinancing Register of the Sellers. The Guarantor holds a transfer claim in relation to each Register and, if so instructed by the Trustee, it will demand the full transfer of any of the receivables (and related collateral) in the Register. The pool of loans, along with any eligible investments and balance standing to the credit of any of the guarantor accounts, forms the CP. Following the occurrence of a Guarantee Event, all funds resulting from the CP are available, subject to the priority of payments being applied, to satisfy the obligations of the Guarantor under the guarantee.
Before the occurrence of a Guarantee Event, virtually all flows of funds are netted, and there is no money accumulating on the Guarantor accounts, except for certain reserves. Following the occurrence of a Guarantee Event, cash flows are no longer netted and money accumulating on the Guarantor accounts is paid out on a monthly basis according to the priority of payments. Funds only need to be paid out to the extent they are available. As such, the CBs effectively switch to a pass-through payment structure with a maturity tailored to the amortisation of the CP.
The “Very Strong” LSF Assessment associated with the Programme reflects DBRS Morningstar’s view of: (1) the satisfactory level of segregation provided by the Refinancing Register framework and the CB holders’ first priority right on the CP, in combination with appropriate contractual mitigants in relation to set-off and commingling risk; (2) the pass-through nature of the structure whereby, following a guarantee event, funds available to the Guarantor are applied pro rata and pari passu to all series of CB; (3) a dynamic liquidity reserve set on each payment date prior to a Guarantee Event to a level sufficient to cover CB interests and senior costs due during the subsequent six months rolling (the reserve is subject to a rating trigger); (4) the ability of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) to request the appointment of a custodian (Sachwalter) in case of insolvency of the Issuer or, in certain circumstances, should the Issuer be subject to certain resolution measures.
Should the Issuer be subject to certain resolution measures under Regulation (EU) No 806/2014 (SRM Regulation) and the German Recovery and Resolution Act, DBRS Morningstar understands that there is a risk that the Issuer’s obligation to pay under the CB would be written down or written off if (1) the cash flows produced from the CP are deemed insufficient to back the amounts due under the guarantee or (2) the CB are not classified as secured liabilities of the Issuer. The OC to which DBRS Morningstar gives credit is currently sufficient to support the assigned CB ratings. A Coverage Ratio Test hard coded in the documentation aims at ensuring a minimum OC of 5% based on Cover Value and 15% on a nominal basis. The test is calculated on the programme amount, without any impairment or reduction that could result from the application of resolution measures.
However, in DBRS Morningstar’s view, given the regulation is untested, should the issuer be subject to resolution measures, the risk that the CB are not classified as secured liabilities of the Issuer is not negligible. In such case, the Guarantee agreement provides for the guarantee to remain in force for the full amount originally undertaken, without any impairment or reduction. Should payments executed by the Issuer at the payment date be insufficient to cover payment of interest and/or principal on the CB according to the original amount (without any impairment or reduction), a guarantee event would be triggered, and the payment obligation would switch to the Guarantor. DBRS Morningstar considers this probability to be higher than what the probability of switching the payment obligations of the Issuer to the CP would be under a legislative CB and has therefore set the CBAP for the Programme one notch below the LT COR of the Issuer. This is a deviation to the “Rating and Monitoring Covered Bonds” methodology.
As of 8 October 2019, the aggregated outstanding balance of the CP underlying the Issuer’s CB was EUR 2.02 billion and composed entirely of retail loans. The CP comprised 23,102 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 69.8% and a WA seasoning of 87 months. Geographically, the pool is mainly distributed in the German regions of North Rhine-Westphalia (30.4% by outstanding balance), Baden-Württemberg (11.5%) and Bavaria (11.0%). Almost all (roughly 98%) of the retail pool yields a fixed coupon and 88% is fully amortising.
The DBRS Morningstar-calculated WA life of the mortgage assets is roughly ten years based on a 0% prepayment rate, which is longer than the expected five 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.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is: “Rating and Monitoring Covered Bonds”.
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include investor reports, stratification tables and loan-by-loan data on the CP and historical default performance data provided by the Issuer.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
For further information on DBRS Morningstar 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: Ketan Thaker, Senior Vice President
Initial Rating Date: 1 November 2019
DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Rating and Monitoring Covered Bonds
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal 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
-- Global Methodology for Rating Sovereign Governments
A description of how DBRS Morningstar 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.