Mortgage Covered Bond Program

Transaction Update: Wuestenrot Bank
AG Pfandbriefbank (Mortgage Covered
Bond Program)
Hypothekenpfandbriefe
Primary Credit Analyst:
Ioan Isopel, Frankfurt (49) 69-33-999-306; [email protected]
Secondary Contact:
Matteo Lanza, London (44) 20 7176 6026; [email protected]
Table Of Contents
Major Rating Factors
Outlook
Rationale
Program Description
Rating Analysis
Related Criteria And Research
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Transaction Update: Wuestenrot Bank AG
Pfandbriefbank (Mortgage Covered Bond
Program)
Hypothekenpfandbriefe
Ratings Detail
Table 1
Program Overview*
Jurisdiction
Germany
Covered bond type
Legislation-enabled
Outstanding covered bonds (Bil. €)
3.43
Redemption profile
Hard bullet
Underlying assets
Mortgages
Jurisdictional support uplift
3
Unused notches for jurisdictional support 0
Target credit enhancement (%)
11.35
Available credit enhancement (%)
12
Collateral support uplift
1
Unused notches for collateral support
2
Total unused notches
2
*Based on data as of September 2015.
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
Major Rating Factors
Strengths
• Well-seasoned cover pool, comprising mainly German residential mortgage assets.
• The covered bonds have well-matched asset and liability maturity profiles.
• Very strong jurisdictional support and 180 days' liquidity coverage required by law.
Weakness
• Commingling and bank account risk before the issuers insolvency that is not addressed structurally or by the
German legal framework, but is mitigated by the available collateralization.
Outlook
Standard & Poor's Ratings Services' stable outlook on Germany-based Wuestenrot Bank AG Pfandbriefbank's
mortgage covered bonds (Hypothekenpfandbriefe) reflects our view that a two notch lowering of our long-term issuer
credit rating (ICR) would not automatically trigger a change to our ratings on the covered bonds. We may lower our
ratings on the covered bond program if we lower the long-term ICR on the issuer by more than two notches or the
available credit enhancement is not commensurate with the overcollateralization required for the 'AAA' rating.
Rationale
We are publishing this transaction update as part of our periodic review of Wuestenrot Bank Pfandbriefbank's
mortgage covered bond program. Our ratings reflect the application of our criteria for rating covered bonds (see
"Related Criteria").
Wuestenrot Bank Pfandbriefbank is domiciled in Germany, which is subject to the EU's Bank Recovery and Resolution
Directive (BRRD). We consider that mortgage covered bonds have a very strong systemic importance to Germany.
These factors increase the likelihood that the issuer would continue servicing its covered bonds without accessing the
cover pool or receiving jurisdictional support, even following a bail-in of its senior unsecured obligations. Therefore,
under our covered bonds criteria, we assess the reference rating level (RRL) as 'a+'.
We considered the likelihood for the provision of jurisdictional support. Based on a "very strong" jurisdictional support
assessment for mortgage programs in Germany, we assigned three notches of uplift from the RRL. Therefore, we
assess the jurisdiction-supported rating level (JRL) as 'aa+'.
Following the assessment of the RRL and JRL, we analyze the credit quality of the cover pool and the availability of
liquidity support and committed overcollateralization to determine the maximum collateral uplift.
The 'AAA' ratings on Wuestenrot Bank's mortgage covered bonds reflect our RRL of 'a+' and JRL of 'aa+', as well as
one-notch of uplift from the JRL for collateral support.
When applicable, we cap our ratings on mortgage covered bond programs under our criteria for rating
single-jurisdiction securitizations above the sovereign foreign currency rating (RAS criteria). Given the current ratings
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
on Germany (unsolicited: AAA/Stable/A-1+), the maximum rating on the program is 'AAA' (see "Methodology And
Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance," published on May 29, 2015).
Lastly, the ratings on the program and related issuances are not constrained by legal, operational, or counterparty
risks.
Program Description
Wuestenrot Bank Pfandbriefbank is a universal bank primarily focused on residential mortgage funding. It is part of the
Germany-based Wuestenrot & Wuerttembergische bancassurance group (W&W).
The covered bonds are regulated by German law and are issued under the debt issuance program, or stand-alone
documentation.
All assets are euro denominated, and the program is not exposed to foreign exchange risk.
Wuestenrot Bank Pfandbriefbank is the issuer and bank account provider (see table below).
Table 2
Program Participants
Role
Name
Rating
Issuer
Wuestenrot Bank AG Pfandbriefbank
A-/Stable/A-2 Yes
Account bank Wuestenrot Bank AG Pfandbriefbank
A-/Stable/A-2 No
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Rating dependency
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
Rating Analysis
Legal and regulatory risks
We consider that the German covered bond legal framework satisfies the relevant legal aspects of our covered bonds
criteria. This enables us to assign ratings to the covered bonds that exceed the long-term ICR on the issuer.
The German Covered Bond Act (Pfandbriefgesetz; "PfandBG") and the relevant secondary legislation provide the legal
framework for the issuance of German covered bonds (Pfandbriefe). The Covered Bond Act was introduced in 2005
and last amended in January 2015. Under the framework, banks can issue public-sector, mortgage, ship, and aircraft
covered bonds.
Covered bond investors have a preferential claim to a cover pool of assets. For mortgage covered bonds, this may
comprise exposures to properties and rights equivalent to real property located in a member state of the European
Union, the European Economic Area, Switzerland, the U.S., Canada, or Japan. The issuer may use mortgages as cover
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
pool assets up to the first 60% of the property's value only, as estimated in accordance with the Pfandbrief Act. The
cover pool may also include exposures to public-sector entities from the same geographic area as stipulated for the
mortgage assets. Additionally, the cover pool can comprise eligible substitute assets.
According to the legal framework, the issuer must maintain overcollateralization of at least 2% on a net present value
basis for the outstanding covered bonds (a risk-based add-on might be requested by the FSA), and ensure 180 days of
liquidity needs at all times.
An independent trustee is responsible for monitoring the cover pool (cover pool monitor) until an independent cover
pool administrator is appointed in case of the issuer's insolvency. BaFin, the German supervisory authority for financial
institutions, appoints and supervises the cover pool monitor and cover pool administrator. BaFin also regularly
conducts a special covered bond audit, usually every two years (see paragraph 3 of the PfandBG).
We have analyzed the risk that, if the issuer becomes insolvent, cash received from the cover pool assets could be
commingled with the cash belonging to the bank, resulting in a loss to the cover pool. We have determined that the
German Covered Bond Act effectively segregates cash received after the issuing bank's insolvency, but that cash
received shortly before insolvency and not reinvested in the cover pool assets could be exposed to commingling risk.
We address this risk in our counterparty section.
In our analysis of legal risk we considered the guidelines in "Europe Asset Isolation And Special-Purpose Entity
Criteria--Structured Finance," published on Sept. 13, 2013, as well as our "Covered Bond Ratings Framework:
Methodology And Assumptions," published on June 30, 2015.
Operational and administrative risks
We review operational risk according to our criteria article "Covered Bond Ratings Framework: Methodology And
Assumptions," published on June 30, 2015. We consider the procedures used by issuer in the origination and
monitoring of cover pool assets.
There are no operational risks that would require a particular adjustment to our standard credit or cash flow
assumptions. We consider that the issuer actively manages the cover pool and has strict origination, underwriting,
collection, and default management procedures. We also believe that it is highly likely that the issuer could appoint a
replacement cover pool manager if it became insolvent.
Resolution regime analysis
The RRL on the issuer, which is the starting point for any further ratings uplift in our analysis, is 'a+'. We consider the
following factors:
• The issuer is domiciled in Germany, which is subject to the EU's BRRD.
• The adjusted ICR is 'a-'.
• We assign two notches of uplift for resolution support for the RRL as we consider the systemic importance to be
'very strong'.
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
Jurisdictional support analysis
The JRL for the issuer's mortgage covered bonds is 'aa+'. Based on our covered bonds criteria, ratings on mortgage
covered bonds in Germany, would be eligible for three notches of uplift above the RRL given our 'very strong'
jurisdictional support assessment of German mortgage covered bonds (see "Assessments For Jurisdictional Support
According To Our Covered Bond Criteria," published on Dec. 22, 2015). We also consider that the issuer's cover pool
continues to comply with legal and regulatory minimum standards in Germany and that the German sovereign rating
does not constrain our ratings on the covered bonds.
Collateral support analysis
We base our loan-level analysis on data provided by the issuer as of as of Sept. 30, 2015. The pool consists of
residential mortgages (82.8%), commercial mortgages (12.7%), and substitute/sector assets (5.2%).
For the mortgage assets, the weighted-average foreclosure frequency (WAFF) and weighted-average loss severity
(WALS) have remained stable compared with our December 2014 analysis.
The issuer actively manages substitute cover pool assets, which leads to some variation in the portfolio's size and our
default risk assessment over time. In line with our criteria "Assumptions For Assessing Portfolios Of International
Public Sector And Other Debt Obligations Backing Covered Bonds And Structured Finance Securities," we consider
that the current subportfolio exhibits low granularity. We therefore assume that all assets with an asset rating input
other than 'AAA' default when we assess the credit risk of the portfolio under a 'AAA' stress. We currently assess the
asset default risk of 70.8% and calculate a recovery rate of 60%.
The target credit enhancement decreased to 11.35% in September 2015 from 12.30% in December 2014, due to a
decrease in asset-liability mismatch and commingling risk in September 2015.
The overcollateralization that is commensurate with the 'AAA' ratings is 8.41%, and although only one notch of
collateral-based uplift is required to reach the 'AAA' rating, we increase the overcollateralization requirement due to
the lack of an overcollateralization commitment from the issuer.
The tables below further summarize the results of our collateral-based analysis.
Table 3
Cover Pool Composition
As of Sept. 30, 2015
Asset type
Residential mortgages
Commercial mortgages
Substitute/public finance assets
Total
As of Dec. 31, 2014
Value (€) Percentage of cover pool (%)
3,127,365,714
Value (€) Percentage of cover pool (%)
82.80 3,205,277,912
82.20
479,680,490
12.70
491,319,972
12.60
169,965,528
4.5
202,766,973
5.20
100 3,899,364,857
100
3,777,011,732
Table 4
Key Credit Metrics
As of Sept. 30, 2015 As of Dec. 31, 2014
Average loan size (€)
Weighted-average LTV ratio (all loan parts) (%)
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67,033
67,957
53.69
54.21
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
Table 4
Key Credit Metrics (cont.)
Weighted-average loan seasoning (months)*
Balance of loans in arrears (%)
110.75
106
0.44
0.00
12.81
12.76
Credit analysis results:
Weighted-average foreclosure frequency (WAFF; %)
Weighted-average loss severity (WALS; %)
AAA credit risk (%)
2
2
5.47
4.04
*Seasoning refers to the elapsed loan term. LTV--Loan-to=value.
Table 5
Covered Pool Assets By Loan Size
(€ 's)
As of Sept. 30, 2015 As of Dec. 31, 2014
0 – 50,000
18.7
19.7
50,000 – 100,000
40.2
43.0
100,000 – 150,000
22.5
23.4
150,000 – 200,000
9.0
8.6
200,000 – 250,000
3.4
2.8
250,000 – 300,000
1.6
1.2
300,000 – 350,000
0.8
0.4
350,000 – 400,000
0.6
0.3
400,000 – 450,000
0.3
0.1
450,000 – 500,000
0.3
0.2
500,000 – 550,000
0.3
0.0
550,000 – 600,000
0.2
0.0
> 600,000
2.2
0.3
Table 6
LTV Ratios (Whole Loan)
As of Sept. 30, 2015 As of Dec. 31, 2014
(%)
Percentage of cover pool (%)
0-60
71.0
65.4
60-80
20.8
20.6
80-90
4.0
5.8
90-100
1.8
3.1
>100
2.4
5.1
Total Above 80
8.0
14.0
LTV--Loan-to-value.
The issuer may use all loan parts and mortgages as cover pool assets up to the first 60% of the property's value only,
as estimated in accordance with the Pfandbrief Act.
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
Table 7
Loan Seasoning Distribution*
As of Sept. 30, 2015 As of Dec. 31, 2014
Percentage of portfolio (%)
Less than 18 months
2.74
3.50
18-60 months
22.88
22.20
Above 60 months
74.38
74.30
*Seasoning refers to the elapsed loan term.
Table 8
Collateral Uplift Metrics
As of Sept. 30, 2015 As of June 30, 2015
Asset WAM (years)
3.97
4.07
Liability WAM (years)
4.21
4.42
Available credit enhancement
12
12.54
Required credit enhancement for first notch of collateral uplift (%)
6.94
5.65
Required credit enhancement for second notch of collateral uplift (%)
8.41
7.26
Required credit enhancement for third notch Collateral Uplift (%)
Target credit enhancement for maximum uplift (%)
9.88
8.87
11.35
10.48
Potential collateral-based uplift (notches)
4
4
Adjustment for liquidity (Y/N)
N
N
Adjustment for committed overcollateralization (Y/N)
Y
Y
Collateral support uplift (notches)
3
3
WAM--Weighted-average maturity.
Counterparty risk
We have assessed counterparty risk under our "Counterparty Risk Framework Methodology And Assumptions,"
published on June 25, 2013, and "Counterparty Risk Analysis In Covered Bonds," published on Dec. 21, 2015.
There are no derivatives registered in the cover pool. We have identified bank account and commingling risk as
potentially relevant counterparty risks for the program.
As commingling and bank account risks are not structurally addressed before the issuer's insolvency, we have modeled
them in our assessment of the target overcollateralization. Based on our worst-case assumptions, we currently assess
the potential loss for commingling and bank account risk to be at 2.12% of overcollateralization.
Based on the currently available information, we believe that the available overcollateralization mitigates bank account
and commingling risk.
Country risk
When applicable, we cap our ratings on mortgage covered bond programs under our updated RAS criteria. Given the
current ratings on Germany, the maximum rating on the program is 'AAA'.
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Transaction Update: Wuestenrot Bank AG Pfandbriefbank (Mortgage Covered Bond Program)
Related Criteria And Research
Related Criteria
• Counterparty Risk Analysis In Covered Bonds, Dec. 21, 2015
• Covered Bond Ratings Framework: Methodology And Assumptions, June 30, 2015
• Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, May 29,
2015
• Methodology And Assumptions: Analyzing European Commercial Real Estate Collateral In European Covered
Bonds, March 31, 2015
• Covered Bonds Criteria, Dec. 9, 2014
• Updated Cash Flow Assumptions For Modeling Certain Covered Bonds, Dec. 9, 2014
• Methodology And Assumptions For Assessing Portfolios Of International Public Sector And Other Debt Obligations
Backing Covered Bonds And Structured Finance Securities, Dec. 9, 2014
• Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013
• Counterparty Risk Framework Methodology And Assumptions, June 25, 2013
• Credit Stability Criteria, May 3, 2010
• Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009
• Update To The Criteria For Rating German Residential Mortgage-Backed Securities, Jan. 6, 2009
• Cash Flow Criteria for European RMBS Transactions, Nov. 20, 2003
• Criteria for Rating German Residential Mortgage-Backed Securities, Aug. 31, 2001
Related Research
•
•
•
•
•
Global Covered Bond Characteristics And Rating Summary Q4 2015, Dec. 29, 2015
Assessments For Jurisdictional Support According To Our Covered Bonds Criteria, Dec. 22, 2015
Assessments For Target Asset Spreads According To Our Covered Bonds Criteria, Dec. 22, 2015
Seeing Signs of Cyclical Improvement, The ECB Doesn't Go All Out, Dec. 14, 2015
Ratings On Wuestenrot Bank AG Pfandbriefbank's Mortgage Covered Bonds Affirmed On Criteria Updates; Outlook
Stable, June 22, 2015
Additional Contact:
Structured Finance Europe; [email protected]
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