DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA ratings on eight Pfandbriefe (the German legislative covered bonds) issued under the Sparkasse Holstein (SKH or the Issuer) Mortgage Pfandbrief programme (SKH CB or the programme). The action follows the completion of a full review of the programme.
There are 12 series of Pfandbriefe outstanding under the programme, totalling a nominal amount of EUR 756 million.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). SKH is the Issuer and reference entity for the programme. There is no Critical Obligations Rating associated with SKH, but DBRS Morningstar considers Germany a jurisdiction for which covered bonds (CBs) 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 in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AAA.
-- No committed overcollateralisation (OC). The minimum-observed OC level during the past 12 months is 65.5%. However, DBRS Morningstar gives credit to a limited level of OC equal to 36%, which is considered to be sustainable based on information from the Issuer and expected market developments.
-- The sovereign rating on the Federal Republic of Germany, rated AAA with a Stable trend by DBRS Morningstar, as of the date of this press release.
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 on the CB ratings.
In addition, all else unchanged, the CB ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded to below A (high); (2) the sovereign rating on 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 31 March 2023, the aggregated outstanding balance of the CP underlying the Issuer’s Pfandbriefe comprised EUR 1,337 million of residential (61.7% of the loan balance) and commercial (35.4%) mortgages, plus EUR 40 million of other assets (sovereign and federal state bonds). 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 1,353 million, which results in a total OC of 78.9%.
As of March 2023, the mortgage CP assets comprised 5,757 mortgage loans, with a weighted-average (WA) seasoning of 80 months and a WA remaining time to maturity of 211 months. The CP is located mainly in Schleswig-Holstein (54.3% by outstanding balance), Hamburg (32.6%), and Lower Saxony (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 to assess 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 54.2% based on lending values (determined as prescribed in the Beleihungswertermittlungsverordnung, BelWertV), and of 40.3% based on market values.
SKH CB do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (6.1% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders (95.9% floating rate linked to six-month Euribor). The available OC mitigates this risk, which DBRS Morningstar accounted for in its cash flow analysis.
DBRS Morningstar calculated the WA life of the mortgage assets to be approximately 11 years based on a 0% prepayment rate, which is longer than the 5.7 years of WA life on the Pfandbriefe, not accounting for any maturity extension. This risk is mitigated by the extended maturity date, which falls one year after the maturity date, and by the OC in place.
All CP assets and the CBs 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 principal 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.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on Sparkassen-Finanzgruppe are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Sparkassen-Finanzgruppe are discussed separately at https://www.dbrsmorningstar.com/issuers/10051.
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Global Methodology for Rating and Monitoring Covered Bonds” (8 May 2023), https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.
Other methodologies referenced in this transaction are listed at the end of this press release.
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/401817/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 data and information used for these ratings include investor reports; stratified data on the CP as at 31 March 2022; and static arrears and defaults by vintage of origination and dynamic arrears, spanning from Q1 2016 to Q1 2022, 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 ratings, 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 these ratings 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 8 June 2022, when DBRS Morningstar confirmed its AAA ratings on eight Pfandbriefe issued under the programme.
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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 7 May 2021
DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27 28046 Madrid, Spain
Tel. +34 (91) 903 6500
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023),
-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023),
-- Global Methodology for Rating Banks and Banking Organisations (23 June 2022),
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
-- Common RMBS Rating Methodology (8 February 2023),
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
-- Rating CLOs and CDOs of Large Corporate Credit (7 February 2023),
-- Rating CLOs Backed by Loans to European SMEs (10 June 2022) and DBRS Diversity Model v. 184.108.40.206,
-- Global Methodology for Rating Sovereign Governments (29 August 2022),
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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.