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Fitch Affirms Landesbank Baden-Wuerttemberg's Public Sector Pfandbriefe at 'AAA'; Outlook Stable
December 8, 2014 / 5:13 PM / 3 years ago

Fitch Affirms Landesbank Baden-Wuerttemberg's Public Sector Pfandbriefe at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, December 08 (Fitch) Fitch Ratings has affirmed Landesbank Baden-Wuerttemberg's (LBBW; A+/Negative/F1+) public sector Pfandbriefe at 'AAA' with a Stable Outlook. KEY RATING DRIVERS The rating is based on LBBW`s Long-term Issuer Default Rating (IDR) of 'A+', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 5 (low risk) and the lowest level of over-collateralisation (OC) observed in the past 12 months, 63.1% as of September 2013. This level of OC supports a 'AA' tested rating on a probability of default basis and allows for a two-notch uplift, reflecting recoveries in excess of 91% on defaulted bonds. The Outlook is Stable despite the Negative Outlook on LBBW's IDR, reflecting Fitch's favourable view on the position of covered bonds under the proposed EU Bank Recovery and Resolution Directive (BRRD). Fitch expects the IDR uplift of 2 to offset potential negative rating action on the IDR resulting from a weakening of State support. LBBW's 'AAA' breakeven OC remains stable at 8.0%. The credit loss component, although reduced over the last 12 months to 4.0% from 4.5%, still constitutes the largest breakeven OC driver. The expected loss decline is mainly driven by an improvement of Fitch's internal scoring-based credit opinions for German municipalities, which comprise 57.5% of the cover pool. The cash flow valuation component of 3.2% remains in line with last year's result (3.5%). It reflects maturity mismatches and open interest rate as well as open foreign exchange positions that are not mitigated by privileged derivatives. The asset disposal loss component (marginally increased to 2.5%) underlines the need for forced asset sales to ensure timely payment of all outstanding Pfandbriefe post issuer default. However, the modelled price discounts on forced asset sales of German sovereign and municipal assets are moderate. For this rating that considers both an uplift on a probability of default (PD) basis and for recoveries given default, the asset disposal loss component is in line with the rating scenario that is tested for timely payments (i.e. 91% tested rating on a PD basis), while the other breakeven OC components represent 'AAA' stresses. This, plus Fitch's testing for at least 91% recoveries rather than 100% to assign 2 notches credit for recoveries given default, is why the sum of the breakeven OC drivers is higher than LBBW's public sector Pfandbriefe breakeven OC. LBBW's public sector Pfandbriefe programme comprises EUR16.81bn outstanding Pfandbriefe secured by a cover pool of EUR27.98bn as of end-June 2014. The biggest guarantor groups are German municipalities, the German sovereign and Federal States that together account for 97% of the portfolio. LBBW's public sector Pfandbrief rating is credit-linked to Germany (AAA/Stable/F1+) as 38% of the cover assets are either directly exposed to or guaranteed by the German sovereign or its federal states. The unchanged IDR uplift of 2 reflects the covered bonds' exemption from bail-in and Fitch's view that Germany is a covered bonds-intensive jurisdiction, that the bank is systemically important in its domestic market and is a large, complex institution. Fitch considers that resolution by other means than liquidation is likely and there is protection provided by senior unsecured debt in excess of 5% of total adjusted assets. RATING SENSITIVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by 4 or more notches to 'BBB' or below; or (ii) the number of notches represented by the D-Cap is reduced to 1 or lower; or (iii) the OC that Fitch considers in its analysis decreases below Fitch's 'AAA' breakeven level of 8.0%.; or (iv) the German sovereign is downgraded to 'AA+' or below. If the OC that Fitch considers in its analysis drops to the legal requirement of 2% on a net present value basis, it would not be sufficient to allow for timely payment of the Pfandbriefe following an issuer default. As a result, the Pfandbrief rating would likely be downgraded to 'AA', two notches above the issuer's IDR. The Fitch breakeven OC for the Pfandbrief rating will be affected, amongst others, by the profile of the cover assets relative to outstanding Pfandbriefe, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the Pfandbriefe rating cannot be assumed to remain stable over time. More details on the cover pool and Fitch's analysis will be available in a credit update, which will shortly be available at Contact: Primary Analyst Tobias Bayerl Analyst +49 69 768 076 126 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analyst Jan Seemann, CFA Director +49 69 768 076 112 Committee Chairperson Rebecca Holter Senior Director +49 69 768 076 261 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available on Applicable criteria, 'Covered Bonds Rating Criteria', dated 8 August 2014, 'Asset Analysis Criteria for Covered Bonds of European Public Entities, dated 30 January 2013, 'Covered Bonds Rating Criteria - Public Sector Liquidity and Refinancing Stress Addendum', dated 07 February 2014, available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Asset Analysis Criteria for Covered Bonds of European Public Entities here Covered Bonds Rating Criteria – Public Sector Liquidity and Refinancing Stress Addendum here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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