06. Apr 2017 Rating news – Covered bonds
Scope assigns AA+ to Austrian Bausparkasse Wüstenrot AG’s mortgage-covered bonds, Outlook Stable
Covered bond ratings reflect the solid credit quality of the issuer, enhanced by a low-risk cover pool.
Scope Ratings (Scope) has today assigned ratings of AA+ with Stable Outlook to the mortgage-covered bonds issued by Austria’s Bausparkasse Wüstenrot AG (Wüstenrot). The ratings are driven by the credit quality of the bank further enhanced by:
- fundamental credit support factors, which provide a credit support of four notches above the bank’s issuer rating; and
- the low-credit-risk cover pool, which further enhances the rating by an additional three notches, by supporting a total of seven notches above the bank’s issuer rating.
In order to analyse the covered bond, Scope assigned a private rating to the bank.
Wüstenrot is the oldest and the only independent Bausparkasse (building society) in Austria. Scope’s bank credit analysis reflects the prudent and conservative management of capital and liquidity, which also is rooted in the bank’s independent position. Its low-risk profile provides resilience during periods of low profitability, and helps address challenges for the bank’s business model from the lower-for-longer interest environment and the changing client behaviour this generates. The bank is one of the first Austrian Bausparkassen to start issuing covered bonds in order to diversify its funding which is currently predominantly funded by Bauspar contract saving deposits. Since receiving a covered bond issuance licence in December 2013, the bank has started to build up its cover pool and to date has only issued one retained covered bond.
Cover pool support
The bank’s cover pool exhibits a low to moderate credit risk evidenced by a purely domestic and geographically well-spread residential cover pool with a low eligible LTV of 53.4%. It only exhibits a low sensitivity to interest rate risk. The extremely high overcollateralisation avoids mismatch risk, and Scope understands that the overcollateralisation will remain sufficient to support the rating even when taking into account the bank’s covered bond issuance plan for the next year. The covered bond rating is based on support provided by the cover pool, and a minimum overcollateralisation of 7.5% will allow the covered bonds to benefit from the maximum three-notch uplift above the fundamental-support-based credit differentiation.
Fundamental credit support
Scope has established that the rating differentiation arising from fundamental credit support is four notches above the bank’s issuer rating. The two notches of uplift are driven by the agency’s analysis of the Austrian covered bond legal framework, which meets all provisions relevant to establishing and maintaining a high-quality cover pool that remains available after the issuer’s potential insolvency. Scope notes that under its methodology the covered bond framework just meets the minimum standards, as the framework remains relatively vague on best practice regarding liquidity or risk management.
The covered bonds also benefit from an additional credit differentiation of two notches, based on an issuer- and country-specific assessment of the benefits of the resolution regime and the systemic importance of covered bonds. The differentiation primarily reflects the preferential treatment of covered bonds when a regulator intervenes in the issuer and Scope's assessment that regulators are likely to maintain the issuer as a going concern.
The Stable Outlook on the covered bonds the stable credit performance of both the bank and its mortgage assets. Scope’s outlook reflects its expectation that the issuer also applies its prudent risk-management strategies for the management of the covered bonds and will establish cover bond funding to diversify its current funding structure. The agency does not expect changes to Wüstenrot’s willingness and ability to continuously provide sufficient overcollateralisation in order to support the very strong credit quality of its covered bonds.
Positive changes to the covered bond ratings could result from a visible improvement of the bank’s profitability. Further, a higher visibility and market-driven, increased importance of covered bonds as an important funding product in Austria, coupled with an increased cohesiveness and cooperation between all relevant stakeholders, could prompt a positive revision of the fundamental support factors.
A decline in the bank’s currently solid credit quality will directly translate into adjustments of the covered bond rating or outlook. Such rating changes could be driven by an increasing risk profile, deteriorating profitability and weakened prudential metrics. An excessive increase of the cover pool’s risk could reduce the support the cover pool provides to the rating. As the fundamental support effectively provides a floor for the covered bond rating, any negative changes to the cover pool’s risk profile would at most result in a maximum downgrade of up to three notches.
Scope has today published a rating report which provides the detailed rating rationale for the covered bond rating and important disclosures. The rating report is freely available on www.scoperatings.com or under the following link.
Michaela Seimen Howat (Bausparkasse Wüstenrot AG): Phone: +44 203 45704-45; Email: firstname.lastname@example.org
Karlo Fuchs (covered bonds issued by Wüstenrot): Phone: +49 30 27891-134; Email: email@example.com
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund and Dr. Sven Janssen.
The covered bond rating analysis has been prepared by Karlo Fuchs, Executive Director
Responsible for approving the covered bond rating: Guillaume Jolivet, Managing Director
The rating concerns a debt type of issuer which was evaluated for the first time by Scope Ratings AG. Scope had already assigned private ratings for the rated instruments in accordance with Regulation (EC) No 1060/2009 on rating agencies, as amended by Regulations (EU) No 513/2011 and (EU) No 462/2013.
Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but with a mandate by Bausparkasse Wüstenrot AG (solicited). The issuer has participated in the rating process
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.
Key sources of Information for the rating
Website of the rated entity/issuer, Annual reports/quarterly reports of the rated entity/issuer as well as other public covered bond specific reports, programme documentation and terms and conditions of the covered bonds issued, current performance information as well as confidential information on the composition of the cover pool composition and related cash flow structures, data provided by external data providers, Interview with the rated entity, press reports, official publications and data series by the central bank and research from reputable market participants.
Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.
Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.
The main methodology applicable for the covered bond rating is: “Covered Bond Rating Methodology”, published 22. July 2016. We also applied the General Structured Finance Rating Methodology, published 31. August 2016 and the principles of the Methodology for Counterparty Risk in Structured Finance published 12. August 2016.
The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.
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