DBRS Ratings Limited (DBRS Morningstar) assigned a AA rating to the Series 1 Pfandbriefe (the German legislative covered bonds) issued under the Sparkasse zu Lübeck AG (SKL or the Issuer) Mortgage Pfandbrief programme (SKL CB or the Programme). Series 1 is a EUR 90 million fixed-rate bond with a coupon of 0.010%. The bond matures in October 2024.
There are 40 series of Pfandbriefe outstanding under the Programme totalling a nominal amount of EUR 390 million.
The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high). SKL is the Issuer and Reference Entity for the Programme. There is no Critical Obligations Rating (COR) associated with SKL, but DBRS Morningstar considers Germany a jurisdiction for which covered bonds (CB) are a particularly important financing tool. As such, the CBAP is set at the level of the Issuer Rating plus one notch.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), 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.
-- No committed overcollateralisation (OC). The minimum-observed OC level during the past 12 months is 57.2%. However, DBRS Morningstar gives credit to a limited level of OC equal to 10%, which is considered to be sustainable based on information from the Issuer and expected market developments.
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, interest rate stresses and market value spreads to calculate liquidation values on the cover pool (CP).
Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CB rating.
In addition, all else unchanged, the CB rating would be downgraded if any of the following occurred: (1) the CPCA was downgraded to below BBB (low); (2) the sovereign rating of the Federal Republic of Germany was downgraded to below A (low); (3) the LSF Assessment associated with the Programme was downgraded to Adequate or below; (4) the quality of the CP and the level of OC were no longer sufficient to support a one-notch uplift for high recovery prospects, (5) the relative amortisation profile of the CB and CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.
As of 30 September 2019, the aggregated outstanding balance of the CP underlying the Issuer’s Pfandbriefe comprised EUR 643 million of residential (76.6% of the loan balance) and commercial (23.4%) mortgages, plus EUR 14.5 million of other assets (Länderanleihen, state bonds issued by federal states). These other assets are held in a deposit account that is not contractualised, and there is no replacement trigger consistent with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology. Therefore, DBRS Morningstar gives 40% credit to these assets, leading to a total considered CP of EUR 649 million, which results in a total OC of 66.4%.
As of September 2019, the mortgage CP assets comprised 4,782 mortgage loans, with a weighted-average (WA) seasoning of 73 months and a WA remaining time to maturity of 183 months. The CP is located mainly in Schleswig-Holstein (80.0% by outstanding balance), Hamburg (15.2%) and Mecklenburg-Western Pomerania (3.7%).
According to the PfandBG, the mortgage loans may only be registered in the CP for a maximum amount up to 60% of the mortgage lending value of the underlying property (LTV limit). In its CP analysis, DBRS Morningstar used the LTVs based on market values. To determine the loss given default (LGD), DBRS Morningstar considered the LTV limit whereas for the determination of the probability of default (PD) DBRS Morningstar considered LTVs that included the entire mortgage balance secured by the underlying property (whole loan LTV). The total pool presents a WA LTV of 52.0% based on lending values (determined as prescribed in the Beleihungswertermittlungsverordnung, BelWertV), and of 41.3% based on market values.
SKL CB do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (8.0% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, paying a fixed rate coupon. This risk is mitigated by the OC available and has been accounted for in DBRS Morningstar’s cash flow analysis.
The DBRS Morningstar-calculated WA life of the mortgage assets is approximately nine years based on a 0% prepayment rate, which is longer than the 6.5 years of WA life on the Pfandbriefe, not accounting for any maturity extension. This risk is mitigated by the OC available.
All CP assets and OH are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
DBRS Morningstar has assessed the LSF related to the Programme as “Very Strong” according to its “Rating and Monitoring Covered Bonds” methodology. For more information, please refer to DBRS Morningstar’s commentaries “DBRS Publishes Commentary on German Covered Bonds Legal and Structuring Framework” and “German Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.
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 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 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 the 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 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: Christian Aufsatz, Managing Director
Initial Rating Date: 24 January 2020
DBRS Ratings Limited
20 Fenchurch Street
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
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European SMEs
-- 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.