DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA rating on 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). The confirmation follows the completion of a full review of the Programme.
There are 45 series of Pfandbriefe outstanding under the Programme, totalling a nominal amount of EUR 465 million.
The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). 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 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 A (high), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-Implied Likelihood (LSF-L) of AAA.
-- No committed overcollateralisation (OC). The minimum-observed OC level during the past 12 months is 33.4%. 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 sovereign rating of the Federal Republic of Germany, rated AAA with a Stable trend by DBRS Morningstar, as of the date of this SRC.
DBRS Morningstar analysed the transaction using its 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 A (high); (2) the sovereign rating of the Federal Republic of Germany was downgraded to below AA; (3) the LSF Assessment associated with the Programme was downgraded; (4) the relative amortisation profile of the CB and CP moved adversely; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.
As of 30 September 2021, the aggregated outstanding balance of the CP underlying the Issuer’s Pfandbriefe comprised EUR 668 million of residential (75.2% of the loan balance) and commercial (22.1%) mortgages, plus EUR 18.5 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 675 million, which results in a total OC of 45.2%.
As of September 2021, the mortgage CP assets comprised 4,838 mortgage loans, with a WA seasoning of 81 months and a WA remaining time to maturity of 157 months. The CP is located mainly in Schleswig-Holstein (77.7% by outstanding balance), Hamburg (15.0%), and Mecklenburg-Western Pomerania (3.9%).
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 (loan-to-value (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 53.4% based on lending values (determined as prescribed in the Beleihungswertermittlungsverordnung, BelWertV), and of 40.6% based on market values.
SKL CB do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (6.5% 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 eight years based on a 0% prepayment rate, which is longer than the 6.1 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 CB are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
DBRS Morningstar 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.dbrsmorningstar.com.
For further information on the Programme, please refer to the rating report at www.dbrsmorningstar.com.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many CPs. The rating is based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 2021. The DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details see the following commentaries: https://www.dbrsmorningstar.com/research/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is: Rating and Monitoring Covered Bonds (10 June 2021).
Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.
DBRS Morningstar 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.
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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.
The sources of information used for this rating include investor reports, stratified data on the CP as at 30 September 2020, and static defaults by vintage of origination, spanning from Q1 2010 to Q4 2020, provided by the Issuer.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, 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.
The last rating action on this transaction took place on 23 March 2021, when DBRS Morningstar upgraded its rating on the Series 1 Pfandbriefe to AAA.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Tomás Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 24 January 2020
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Rating and Monitoring Covered Bonds (10 June 2021), https://www.dbrsmorningstar.com/research/379983/rating-and-monitoring-covered-bonds.
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (10 June 2021), https://www.dbrsmorningstar.com/research/379985/rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Global Methodology for Rating Banks and Banking Organisations (19 July 2021), https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (29 November 2021) and European RMBS Credit Model v 126.96.36.199, https://www.dbrsmorningstar.com/research/388848/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Rating CLOs and CDOs of Large Corporate Credit (8 February 2021),
-- Rating CLOs Backed by Loans to European SMEs (28 June 2021) and DBRS Diversity Model v. 188.8.131.52,
-- Global Methodology for Rating Sovereign Governments (9 July 2021), https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.