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TEXT-S&P cuts Dexia Kommunalbank Deutschland covered bonds to 'AA-'
July 2, 2012 / 5:16 PM / in 5 years

TEXT-S&P cuts Dexia Kommunalbank Deutschland covered bonds to 'AA-'

OVERVIEW
     -- We have lowered to 'AA-' from 'AA+' our ratings on Dexia Kommunalbank 
Deutschland's public-sector covered bonds. The ratings remain on CreditWatch 
negative.
     -- Following restructurings of the cover pool, we have reviewed the most 
recent asset and cash flow information provided by the issuer and have 
analyzed the cover pool management strategy. We understand that the issuer 
intends to actively manage the cover pool at a level below the maximum 
achievable covered bond rating. We expect that the level of 
overcollateralization provided will only be commensurate with a 'AA-' rating, 
all else being equal.
     -- Our ratings on Dexia Kommunalbank Deutschland's public-sector covered 
bonds remain on CreditWatch negative, to reflect the current CreditWatch 
negative placement on Dexia Credit Local, of which we consider DKD to be a 
core entity. Furthermore, the CreditWatch placement on the covered bonds 
reflects that we will closely monitor the management of the supporting 
overcollateralization, as adverse management of this could result in negative 
rating action on the covered bonds.
     -- These ratings are based on our criteria for rating covered bonds. 
However, the methodologies and assumptions underlying these criteria are under 
review. The ratings on all outstanding covered bonds in this program may be 
affected as a result of this review.
    
    July 2 - Standard & Poor's Ratings Services today lowered to 'AA-' from
'AA+' its credit ratings on Dexia Kommunalbank Deutschland AG's (DKD)
public-sector covered bond program and all related issuances. The ratings remain
on CreditWatch negative (see list below).

In recent months, DKD has actively restructured the asset and liability 
profile of its covered bonds, with a view to reducing the asset-liability 
mismatch (ALMM) risk. We have reviewed the issuer's restructuring by analyzing 
the most recent asset and cash flow information provided.

Although DKD aims for a low ALMM risk and is potentially able to support a 
higher rating on the covered bonds, we understand that, going forward, it 
intends to manage the cover pool at a level below the maximum achievable 
covered bond rating. We understand that the overcollateralization provided 
will remain close to the level currently provided, and thus only commensurate 
with a 'AA-' rating, all else being equal.

In applying our five-step approach for rating covered bonds (see "Revised 
Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In 
Covered Bonds," published on Dec. 16, 2009), we have found the ALMM risk to be 
commensurate with a "Low" ALMM classification and the program categorization 
to be "1"--resulting in a potential seven-notch uplift above the issuer credit 
rating on Dexia Credit Local S.A. (DCL), of which we consider DKD to be a core 
entity.

In step 4, we have determined the target credit enhancement required to 
support the maximum potential uplift to be 8.61%. As of May 31, 2012, the 
overcollateralization of 7.33% (based on Standard & Poor's adjusted reporting) 
is below the target credit enhancement. In step 5, we have determined that the 
current overcollateralization can only support an elevation of five notches 
above the issuer credit rating on DCL--that is, the overcollateralization is 
only commensurate with a 'AA-' rating level. We have therefore lowered our 
ratings on the public-sector covered bond program and all related series to 
'AA-'.

The ratings remain on CreditWatch negative. In principle, the issuer would be 
able to mitigate a potential downgrade of DCL, as it has the ability to gain 
further notches of uplift; however, we understand that the issuer currently 
only intends to maintain the current level of support, which only is 
commensurate with an uplift of five notches. Any negative rating action on the 
parent would therefore also result in a downgrade of DKD's public-sector 
covered bonds.

Furthermore, the CreditWatch negative placement reflects that we will monitor 
the management of the risks the covered bonds are exposed to, and the 
management of the overcollateralization to mitigate those risks. Adverse 
management of the overcollateralization might (all else remaining equal) 
result in a downgrade of DKD's covered bonds.

We aim to resolve our CreditWatch negative placement of the long-term ratings 
on DKD's public-sector covered bond program shortly after we have resolved the 
CreditWatch placement on DCL. For the CreditWatch resolution, we will also 
take into account DKD's track record of managing the overcollateralization of 
the cover pool in line with the currently assigned ratings.

POTENTIAL EFFECTS OF PROPOSED CRITERIA CHANGES

The assumptions and methodologies used in the credit and cash flow analysis 
are currently under review (see "Advance Notice Of Proposed Criteria Change: 
Methodologies And Assumptions For Rating Certain Covered Bonds And CDOs," 
published on Aug. 5, 2010). The scope of our review of the analysis of 
public-sector assets may include our default rate stresses, correlation 
assumptions, recovery levels, model risk, concentration limits, and credit 
enhancement levels. Furthermore, as part of our cash flow analysis, we used 
Standard & Poor's Covered Bond Monitor to calculate the target credit 
enhancement for the covered bonds. The assumptions and methodologies used in 
this cash flow analysis are also under review.

This review may result in further changes to the criteria. As a result, our 
future assumptions and methodologies used in our Covered Bond Monitor model 
may differ from our current criteria. The criteria change may affect the 
ratings on all outstanding covered bonds in this program. Until such time that 
we adopt new criteria for rating covered bonds, we will continue to rate and 
surveil these covered bonds using our existing criteria (see "Related Criteria 
And Research").

RELATED CRITERIA AND RESEARCH

     -- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 
2012
     -- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised 
Methodology And Assumptions For Target Asset Spreads, April 24, 2012
     -- Ratings Lowered On Dexia Kommunalbank Deutschland's Public-Sector 
Covered Bonds After Issuer Downgrade, April 5, 2012
     -- Global Covered Bond Characteristics And Rating Summary Q1 2012, March 
29, 2012
     -- Dexia Credit Local Downgraded To 'BBB' On Weakened Liquidity And Risk 
Position; Ratings Remain On Watch Negative, March 28, 2012
     -- European Structured Finance Scenario And Sensitivity Analysis: The 
Effects Of The Top Five Macroeconomic Factors, March 14, 2012
     -- Ratings On Dexia Kommunalbank Deutschland's Covered Bonds Placed On 
CreditWatch Negative After Bank Downgrade, Dec. 9, 2011
     -- Global Structured Finance Scenario And Sensitivity Analysis: The 
Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
     -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology 
And Assumptions, June 14, 2011
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- Advance Notice Of Proposed Criteria Change: Methodologies And 
Assumptions For Rating Certain Covered Bonds And CDOs, Aug. 5, 2010
     -- Methodology: Credit Stability Criteria, May 3, 2010
     -- Revised Methodology And Assumptions For Assessing Asset-Liability 
Mismatch Risk In Covered Bonds, Dec. 16, 2009
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 
2008
     -- Methodology & Assumptions: Applying The Derivative Counterparty 
Framework To Covered Bonds, Feb. 26, 2008
     -- A Listing Of S&P's New Actions Aimed At Strengthening The Ratings 
Process, Feb. 7, 2008
     -- Revised Framework For Applying Counterparty And Supporting Party 
Criteria, May 8, 2007
     -- CDO Spotlight: Rating Approach To Synthetic CDOs Of Sovereigns Or 
Local And Regional Governments, May 3, 2006
     -- Expanding European Covered Bond Universe Puts Spotlight on Key 
Analytics, July 16, 2004
     -- German Pfandbrief Framework Further Improved, March 30, 2004
     -- Surviving Stress Scenarios: Assessing Asset Quality of Public Sector 
Covered Bond Collateral, Sept. 30, 2003
     -- Rating Pfandbriefe--The Analytical Perspective, Jan. 27, 2003
 
RATINGS LIST

                     Rating
Program/      To                From
Country: Covered bond type

Ratings Lowered And Remaining On CreditWatch Negative

Dexia Kommunalbank Deutschland AG

              AA-/Watch Neg      AA+/Watch Neg

Germany: German legislation-enabled public-sector covered bonds ("Oeffentliche 
Pfandbriefe")

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