April 5, 2012 / 1:47 PM / 5 years ago

TEXT-Fitch affirms Landesbank Baden-Wuerttemberg public sector pfandbriefe

April 5 - Fitch Ratings has affirmed Landesbank Baden-Wuerttemberg's
 (LBBW, 'A+'/Stable/'F1+') outstanding public sector Pfandbriefe at
'AAA'. The affirmation follows the agency's assessment of the cover pool's
credit risk and the cash flow mismatches between the programme's assets and
liabilities.	
	
The covered bond rating is based on LBBW's Long-term Issuer Default Rating (IDR)
of 'A+' and a revised Discontinuity Factor (D-Factor) of 8.3% (increased from
7.4%), the combination of which enables LBBW's public sector Pfandbriefe to be
rated up to 'AAA' on a probability of default (PD) basis, provided that
overcollateralisation (OC) between the cover assets and the Pfandbriefe is
sufficient to sustain the 'AAA' stress. Based on the first complete line-by-line
data delivery, the agency's assessment of the time needed for the liquidation of
the cover pool assets in the event of the issuer's default led to a decreased
liquidity gap figure which led to the increase in the D-Factor. All else being
equal, the covered bonds can remain rated 'AAA' provided the IDR remains at
least 'BBB' and a two-notch recovery uplift can be reached.	
	
Fitch has revised its view on the level of nominal OC supporting a 'AAA' rating
on the public sector Pfandbriefe to 9.0% from 14.0%. This decrease is mostly
driven by the improved data quality, which has led to improved credit results
compared to the last review. In the absence of detailed line-by-line information
for a significant portion of the cover pool, Fitch made use of conservative
assumptions to overcome the data gaps. LBBW has now provided detailed
line-by-line information on all cover assets which Fitch has used in its current
analysis. As a consequence, the 'AAA' default rate and recovery rate
assumptions, equating to 10.5% and 79.7%, respectively, have significantly
improved compared to the last review when the agency calculated 22.2% and 76.1%,
correspondingly. LBBW's public sector covered bonds programme has also benefited
from improved cash flow matching in terms of maturities and currencies.	
	
The OC supporting a given rating will be affected, among others, by the profile
of the cover assets relative to outstanding Pfandbriefe, which can change over
time, even in the absence of new issuances.	
	
As of 30 December 2011, LBBW's EUR40.7bn outstanding public sector Pfandbriefe
were secured by a cover pool of EUR52.1bn, resulting in nominal OC of 28.1%,
while the lowest level of OC in the past 12 months was 27.6%. German exposure
accounted for 96.7% of the cover pool followed by Swiss (0.9%) and US (0.6%)
exposure. The exposure to non-'AAA' countries represents around 1.4% of the
portfolio. Given this small exposure, Fitch has not applied additional stress
tests. The Pfandbriefe's rating is credit-linked to Germany's 'AAA' rating, as
42% of the cover pool is directly exposed to or guaranteed by the German
sovereign and federal states.	
	
Almost all assets (97.5%) and Pfandbriefe (96.2%) are euro-denominated. However,
there are currency mismatches arising from the remaining CHF, USD, JPY and GBP
positions on the asset and liability side. The programme has a notable open
interest rate position, as around 31.6% of the assets are floating rate compared
to only 10.2% of the Pfandbriefe. Fitch has taken these mismatches into account
in modelling the expected cash flows by applying appropriate stresses. The
existing market risks are not mitigated by privileged derivatives.	
	
More details on the portfolio and Fitch's analysis will be available in a credit
update, which will shortly be available at www.fitchratings.com	
	
	
Additional information is available on www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable criteria, 'Covered Bonds Rating Criteria', dated 12 August 2011 and
'Covered Bonds Counterparty Criteria', dated 13 March 2012 are available at
www.fitchratings.com.	
	
Applicable Criteria and Related Research:	
Covered Bonds Rating Criteria	
Covered Bonds Counterparty Criteria

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