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German Covered Bond Market Insights 2020


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German Covered Bond Market Insights 2020

In its Covered Bond Market Insights report, S&P Global Ratings presents the local covered bond market, explains how the relevant legal framework works, provides an overview on the local mortgage market, compares key characteristics of the existing programs, and presents the results of a scenario analysis.

In this report, we review the German covered bond market. In our view, relatively stable ratings and outlooks on issuers and a strong sovereign will continue to support ratings stability for German covered bonds in the medium term despite the COVID-19 pandemic.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Overview: Germany, Home Of The Pfandbrief

The popularity of the Pfandbrief is unparalleled in Europe, and the Pfandbrief is supported by an indisputable track record dating back more than 250 years. The Pfandbrief has benefitted from constant investor demand throughout a period of significant changes, such as German reunification and the introduction of the euro.

Despite the Pfandbrief's stellar reputation, outstanding covered bond volume has reduced by over half from €885 billion before the financial crisis in 2007, when Germany had the largest volume in the world. Today, Germany has the second-largest covered bond market behind Denmark and the largest euro benchmark market, with outstanding issuances totaling €355 billion in 2020.

Although the size of the market has stabilized in recent years, it faces a number of challenges. Some are widely shared by the general covered bond market, while some more specific to the German economy.

Chart 1


Chart 2


Eurozone monetary stimulus following COVID-19

Following the COVID-19 pandemic outbreak, the European Central Bank (ECB) announced a significant bond purchase facility, the Pandemic Emergency Purchase Programme (PEPP), on March 18, 2020. The ECB said the asset purchase program will last until at least June 2021, and at the beginning of June, it increased the program to €1,350 billion from the €750 billion. The program is designed to keep capital markets functioning, liquidity flowing, and to encourage banks to extend capital to stimulate the economy. We expect the ECB's monetary policy to remain loose at least until 2023. The PEPP comes on top of the €20 billion of monthly Asset Purchase Programme (APP) net purchases as well as the Corporate Sector Purchase Programme (CSPP), and we expect that covered bond yields will remain at historically low levels.

European covered bond framework under implementation

In September 2019, the European Parliament approved the final version of the directive and regulation on the harmonization of covered bonds. Following the publication of the directive and regulation in the Official Journal of the European Union, national authorities have 18 months to transpose it into their national legislation and an additional 12 months to apply the new rules. The alignment of the German legislative framework with the best practices of the European Banking Authority is medium (see "Harmonization Accomplished: A New European Covered Bond Framework," published April 18, 2019). However, the main required updates are to implement a nominal minimum for overcollateralization and liquidity coverage. The harmonization directive allows for potential revisions of current loan-to-value limits, use of derivatives, and overall asset eligibility. We expect all changes to be carried out with the highest respect to the tradition and reputation of the current framework. Making more significant changes to the framework has the potential to increase both the attractiveness as well as risk of the new Pfandbrief, in our opinion.

COVID-19 tightens its grip on Europe's mortgage markets

As a result of the COVID-19 pandemic and its impact on the economy, we expect house prices to decline in nearly all European markets this year. For Germany, we forecast a decline in prices by 1.2% this year and 0.4% in 2021. We believe that large-scale job support schemes deployed by governments across Europe, such as Germany's "Kurzarbeit" (reduced working hours), will contain the rise in unemployment rates and therefore the decline in house prices. By 2022 nearly all markets should return to relatively strong house-price growth (see "Government Job Support Will Stem European Housing Market Price Falls," published May 15, 2020).

The Covered Bond Framework: Detailed Regulation Limits Risk But With Little Space For Innovation

Legal framework

While the Pfandbrief has origins prior to the establishment of present-day Germany, the German Pfandbrief Act (Pfandbriefgesetz, PfandBG; The Regulation on the Determination of the Mortgage Lending Value) known today stems from 2005, and it has since been amended from time to time. In addition to the main legal framework, three issuer-specific frameworks allow for the issuance of covered bonds (DZ-Bank covered bonds, DSL covered bonds, and Landwirtschaftliche Rentenbank covered bonds).

The German covered bond law divides covered bonds into specific bonds backed by different assets types: mortgage loans (Hypothekenpfandbriefe), public sector debt (Öffentlichepfandbriefe), ship mortgages (Ship Pfandbriefe), or aircraft mortgages (Aircraft Pfandbriefe). These asset types must be included in separate cover pools, but the majority of Pfandbrief issuances are backed by two different types of collateral: public sector loans and mortgage loan-backed covered bonds (approximately 98% of the market). For each covered bond type, the German covered bond law defines the eligible assets, the loan characteristics, and eligible jurisdictions.

Chart 3


Table 1

Legal Framework Comparison
Germany France France Netherlands U.K.
Product Pfandbriefe Obligations à l'Habitat (OH) Obligations Foncières (OF) Dutch registered covered bond program Regulated covered bonds (RCB)
Legislation PfandbriefAct (Pfandbriefgesetz - PfandBG) from May 22, 2005, amended in 2009, 2010, 2013, 2014, and 2015 Article L. 515-34 and seq. of the French Monetary and Financial Code The articles L.513-2 to L.513-27 and R.513-1 and seq. of the French Monetary and Financial Code Financial Supervision Act as amended in 2014 and subsequent amendments Regulated covered bond regulations 2008 and subsequent amendments
Issuer Universal credit institution with a special license Specialized credit institution Specialized credit institution Universal credit institution with a special license Universal credit institution with a special license
Owner of the cover assets Issuer Credit institution (pledged to the issuer and transferred upon trigger event) Issuer or credit institution (pledged to the issuer and transferred upon trigger event) SPE (guarantor of the covered bonds) SPE (guarantor of the covered bonds)
Cover asset type Public sector assets, mortgage loans, ship loans, aircraft loans, credit institutions Mortgage loans, securitizations Public sector assets, mortgage loans, securitizations, credit institutions Public sector assets, mortgage loans, ship loans, credit institutions Public sector entities, mortgage loans
Mortgage cover asset location EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, Singapore EEA (currently domestic only) EEA EEA (currently domestic only) EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, Channel Islands, Isle of Man
Residential mortgage cover assets LTV limit 60% 80% Residential: 80%; state-guaranteed loans: 100% 80% Residential: 80% LTV under the CRD; program documents on Regulated Covered Bonds currently a 75% LTV limit
Primary method for mitigating market risk "Natural" hedging stress testing "Natural" hedging stress testing Derivatives Derivatives Derivatives
Mandatory overcollateralization 2% NPV 5% nominal 5% nominal 5% nominal 8% nominal
SPE--Special-purpose entity. EEA--European Economic Area. NPV--Net present value. LTV--Loan to value. Source: European Covered Bond Council, S&P Global Ratings.

In addition to general banking supervision, a Pfandbrief bank is subject to a special form of supervision by the Federal Financial Supervisory Authority (BaFin) to ensure compliance with the covered bond law. As the cover pool remains a part of the issuer's general balance, the BaFin appoints an independent cover pool monitor to ensure that the register for the cover pool is properly maintained at all times. Derivatives are eligible for cover pools under certain conditions and are subject to certain limitations. Payments to counterparties rank equal to Pfandbrief creditors.

One of the central pillars supporting the strong history of the mortgage Pfandbrief is that eligible loans may be included in cover pools only up to the mortgage lending limit of 60% of the valuation of the property securing the loan. Further, the valuation is a "Beleihungswert," a conservative valuation based on long-term considerations, and by definition, always lower than the current market price.


Commingling risk refers to the risk that cash collected from the cover assets (mortgage loans, for example) could be trapped in the insolvent estate or temporarily restricted from servicing the covered bonds. If the insolvent issuer's estate can make a claim, such cash collections may be considered lost or frozen depending on its status under general insolvency law. The German cover register does not constitute a legal entity prior to the default of the issuer. Therefore, following the issuer's insolvency, cash is held in the issuer's name and some cash holdings are held on the cover pool's behalf, which creates a potential risk of commingling.

Chart 4


Overcollateralization and liquidity tests

The covered bond law requires that the nominal value of the assets is higher than the value of the liabilities at all times. Additionally, issuers must include 2% overcollateralization on a net present value basis based on a weekly stress test. Finally, the issuer must cover the maximum liquidity need within the next 180 days.

These tests are designed to not only ensure a minimum ratio of cover pool assets for covered bonds, but they also serve to limit liquidity risk. The tests have been the source of animated debate in light of the introduction of net stable funding requirements and the EU's covered bond harmonization directive (see "Soft Bullet Proposal For German Covered Bond Law Is Unlikely To Affect Ratings," published April 22, 2016).

Table 2

German Covered Bond Programs--Overview
Program Long-term issuer credit rating Covered bond rating Outstanding covered bonds (mil. €)* Program type* Collateral type* Link to surveillance report Link to transaction update
Mortgage covered bond programs
Wuestenrot Bausparkasse AG A-/Stable/A-1 AAA/Stable/-- 1,791.6 Hard bullet 92.6% residential, 0.96% commercial, 6.5% substitute assets Link Link
DZ HYP AG - Mortgage Sector Program AA-/Negative/A-1+ AAA/Stable/A-1+ 30,739.1 Hard bullet 57.10% residential, 40.70% commercial, 2.19% substitute assets Link Link
Deutsche Apotheker-und Aerztebank eG AA-/Negative/A-1+ AAA/Stable/-- 6,815.6 Hard bullet 77.04% residential, 20.08% commercial, 2.88% Substitute assets Link Link
Public covered bond programs
DZ Hyp - Public Sector Covered Bond program AA-/Negative/A-1+ AAA/Stable/-- 13,382.2 Hard bullet 99.59% public sector, 0.41% substitute assets Link Link
NRW Bank AA/Stable/A-1+ AAA/Stable/-- 1,520.4 Hard bullet 100% public sector N/A Link
DZ BANK AG Deutsche Zentral-Genossenschaftsbank AA-/Negative/A-1+ AA+/Stable/A-1+ 9,412.6 Hard bullet 0.03% mortgages, 16.53% public sector, 1.54% substitute assets, 81.90% other Link Link
*Except for NRW Bank, as reported by the issuer in the March 2020 HTT report. N/A--Not applicable.

Mortgage Market Overview: COVID-19 Brings GDP Down, Unemployment Up

Economic growth at risk

Due to the COVID-19 pandemic, we revised our expectations downward for the German economy. We anticipate that Germany's real GDP will decline by 6.2% in 2020 before recovering by 4.4% in 2021. The government has initiated fiscal stimulus of more than €1 trillion to support the economy, including cash transfers, credit, and guarantees to support corporates. It also initiated a partial unemployment scheme called "Kurzarbeit," which involves reduced working hours.

We revised our labor market forecasts for the next few years and expect an unemployment rate of 5.0% for 2021, up from 3.4% in 2018. Still, according to our forecasts, Germany would have a lower unemployment rate compared to peer countries like Belgium or the U.K.

It is likely that the German economy will drift into a recession in 2020, as a result of weak consumption due to the containment measures imposed by the government as well as weak exports.

Table 3

Economic Indicators
Year Real GDP growth (%) Unemployment rate (%) Nominal house prices (%)
2018 1.5 3.4 6.1
2019 0.6 3.2 5.6
2020f (6.2) 4.2 (1.2)
2021f 4.4 5.0 (0.4)
2022f 2.6 4.8 3.9
2023f 1.6 4.4 3.4
Source: S&P Global Ratings. f--Forecast.

Chart 5


Chart 6


German cover pools

German cover pools are managed according to the German covered bond legislation, which allows for dynamic management of the cover pool. This may affect the asset composition, the geographical focus of the assets, and the level of overcollateralization (as long as it is above the legal minimum), while issuers may utilize covered bonds more or less depending on their funding needs. The following table depicts the development of the top 10 issuers in Germany's covered bond market. It shows the change in outstanding bonds over time as the market has moved from covered bonds backed by public sector assets to mortgage backed covered bonds. Further, the changes reflect consolidation in the market, with a number of mergers taking place since 2011.

Table 4

Comparison Of Top 10 Issuers (Bil. €)
As of Q1 2020 As of Q3 2018 As of Q2 2017 As of Q4 2011
DZ HYP Hypf 30,739.1 DZ HYP Hypf (prev. DG/WL Hyp Hypf) 28,390.4 Münchener Hypo Hypf 22,255.0 LBBW Oepf 40,656.0
Munchner Hypo Hypf 27,898.3 Munchner Hypo Hypf 23,159.2 Unicredit Bank AG Hypf 17,129.3 Hypothekenbank Frankfurt Hypf 38,919.2
HELABA Oepf 26,841.3 Commerzbank Hypf 20,148.2 HELABA Oepf 16,696.3 Deutsche Pfandbriefbank Oepf 33,742.4
Unicredit Bank AG Hypf 24,580.9 Unicredit Bank AG Hypf 18,249.2 Bayern LB Oepf 16,678.6 Dexia Kommunal Bank Oepf 32,746.0
Commerzbank Hypf 21,016.5 Bayern LB Oepf 17,752.0 WL Bank Hypf 16,388.5 Hypothekenbank Frankfurt Oepf 32,396.8
Bayern LB Oepf 18,472.5 Deutsche Pfandbriefbank Hypf 16,066.0 Deutsche Pfandbriefbank Hypf 14,904.4 Bayern LB Oepf 29,670.0
Deutsche Pfandbriefbank Hypf 16,365.0 Nord LB Oepf 15,921.3 Commerzbank Hypf 14,869.6 Unicredit Bank AG Hypf 25,431.5
Berlin Hyp Hypf 14,071.4 DZ HYP Oepf (prev. DG Hyp Oepf) 15,890.5 Nord LB Oepf 14,237.0 DG Hyp Oepf 23,379.9
DZ HYP Oepf 13,382.2 HELABA Oepf 15,020.5 HELABA Hypf 12,054.5 Nord LB Oepf 19,811.0
HELABA Hypf 12,261.5 Berlin Hyp Hypf 13,892.7 LBBW Hypf 11,758.0 WL Bank Oepf 19,788.6
Total 205,628.7 184,490.0 156,971.2 296,541.4
Hypf--Mortgage. Oepf--Public sector.

Since 2011, we have seen an increase in residential mortgage assets in the cover pool, while the percentage of commercial real-estate has decreased.

Chart 7


Residential mortgage loans

Most German residential mortgage loans have a fixed interest rate for 10 to 20 years. The borrower agrees to the amount of regular installments and also decides whether to make additional down payments on the loan (Sondertilgung). Full prepayment before maturity requires the borrower to compensate the issuer. Installments are the same amount throughout the repayment period, and the interest portion is therefore high in the beginning, while repayment increases over the life of the loan. Not all loans are repaid in full at maturity, and such loans would need refinancing before maturity. Historically, residential mortgage loans have been funded been by savings banks using funds available due to Germany's high savings rates.

Building society loans (Bausparvertrag)

Since 2016, building societies (Bausparkassen) have been allowed to issue covered bonds. The typical Bausparkassen product consists of an annuity loan linked to a building society savings program funding residential mortgages. Installments paid into the program are used to pay off the mortgage at a later stage. The popularity of building society loans increased rapidly from the late 1970s until the mid-1990s because they guaranteed high interest rates on savings and security. However, the low interest rate environment has reduced demand for new contracts. There is significant potential for further covered bond issuance, but recently issuance volume has been subdued.

Commercial real estate loans

Commercial properties eligible for German cover pools vary but consist mainly of office space, retail facilities, and to a lesser extent, industrial space. The largest segment is often multifamily housing, which from a regulatory standpoint is not considered commercial real estate exposure. Mortgage loans are normally variable-rate linked to the euro interbank offered rate (EURIBOR) and have shorter maturities and interest-only characteristics. As chart 7 shows, although the percentage of commercial real estate mortgages is decreasing, the total percentage of commercial and multifamily housing properties included as security in the German cover pools remains above 50%. The percentage of collateral secured by all property types in Germany now makes up almost 80% on average.

Public sector loans

Public sector loans are relatively diverse, ranging from loans to German local and regional governments, public utility companies, export credit agencies, and supranational organizations. However, local and regional government debt has decreased, and banks have struggled to find other assets with attractive margins for covered bond funding.

COVID-19 and the consequent increase in spending by local and regional governments may increase their need for funding, and in turn, this may support new issuance of public sector Pfandbriefe (see "How COVID-19 Will Change Covered Bonds," published July 8, 2020).

Cover pool management changes over time

As the charts below show, German cover pools rely on different levels of commercial assets. While most issuers focus on assets sourced in Germany, some are mainly using non-German assets to issue covered bonds. The impact of COVID-19 may therefore affect different programs to different degrees. Our credit analysis reflects the respective geography of the assets, while the remaining uplift reflects the issuer's jurisdiction.

Chart 8A


Chart 8B


Given the change in the utilization of covered bonds and the risk composition of the cover pools, the overcollateralization levels evolve from time to time. Generally, we observe very high levels of available overcollateralization, but the below chart highlights notable differences and high levels of change over the period.

Chart 9


Green covered bonds emerge

A source for new issuance has been green and social covered bonds. Berlin Hyp paved the way for green covered bonds, while Deutsche Hypo, Landesbank Baden Wuertemberg, and Munchner Hyp have since followed with further issuances. More recently, Deutsche Kredit Bank launched a so-called blue covered bond program backed by public utility funding (see "Are Covered Bonds Becoming More Sustainable?" published Sept. 6, 2019). Issuers have claimed that there have been advantageous funding conditions for green and social covered bonds, but more importantly, there has been interest from investors that normally do not invest in the covered bond market. The green and social market remains limited in size, but as one of the largest covered bond markets, we expect German covered bond issuers to be on the forefront of developments within this growing segment. Since 2019, the Association of German Pfandbrief banks (VDP) has maintained the minimum standards for Green Pfandbriefe, and further product development is planned by the participating banks.

Table 5  |  View Expanded Table

German Covered Bond Programs--Key Characteristics
German mortgage covered bond programs Outstanding assets (mil. €)* No. of loans* WA LTV (%)* WA seasoning (months)* Interest rate type* Repayment type* WAFF (%) WALS (%)
Wuestenrot Bausparkasse AG 2,483 36,149 43.64 142.97 99.1% fixed, 0.9% floating 83.6% amortizing, 16.4% bullet/IO 8.72 6.8
DZ HYP AG - Mortgage Sector Program 36,509.4 110,145 49.92 54.84 89.04% fixed, 10.94% floating, other 0.02% 65.3% amortizing, 24.8% bullet/IO, 10% other 20.39 32.8
Deutsche Apotheker-und Aerztebank eG 7,454.82 77,865 55.07 56.88 90.31% fixed, 9.69% floating 65.71% amortizing, 30.55% bullet/IO, 3.74% other 25.54 26.92
German public sector covered bond programs Outstanding assets (mil. €)* Public sector assets (%)* Scenario default rate (%)/scenario loss rate (%) Weighted-average cover pool rating Available credit enhancement (%) Target credit enhancement (%) 'AAA' credit risk (%) O/C consistent with the current rating (%)
DZ Hyp - Public Sector Covered Bond program 16,068.04 100 24.09 A- 20.94 13.63 10.01 10.01
NRW Bank 2,488.90 100 83.18 B- 63.7 60.08 19.92 19.92
DZ BANK AG Deutsche Zentral-Genossenschaftsbank 19,493.26 17 N/A N/A 98.68 WH WH 6.78
Note: This table can be expanded on to view all of the data presented in tables 2, 5, and 6, in one combined table. The data can also be exported to Microsoft Excel. *Except for NRW Bank, as reported by the issuer in the March 2020 HTT report. WA--Weighted-average. LTV--Loan-to-value. WAFF--Weighted-average floreclosure frequency. WALS--Weighted-average loss severity. N/A--Not applicable. WH--Withheld at the issuer's request. O/C--Overcollateralization.

Chart 10


Ratings Outlook: Covered Bonds Are Well Insulated From The Risk Of Bank Downgrades

German covered bonds benefit from highly-rated issuers, which are the first recourse for bondholders. Moreover, programs with a highly-rated issuer can benefit from unused notches of uplift, offering some protection against downgrades of the issuing bank.

Chart 11


Table 6

German Covered Bond Programs--Credit Enhancement
Program Available credit enhancement (%) Target credit enhancement (%) 'AAA' credit risk (%) O/C consistent with the current rating (%) Unused notches
Mortgage Covered Bond Programs
Wuestenrot Bausparkasse AG 33.53 9.08 6.75 7.92 2
DZ Hyp AG - Mortgage Sector CB Program 15.41 10.31 8.2 8.2 5
Deutsche Apotheker- und Aerztebank eG 9.38 9.09 6.66 6.66 5
Public Sector Covered Bond Programs
DZ Hyp AG - Public Sector CB Program 20.94 13.63 10.01 10.01 5
NRW Bank 63.7 60.08 19.91 19.92 3
DZ BANK AG Deutsche Zentral-Genossenschaftsbank 98.68 W/H W/H 6.78 3
WH--Withheld at the issuer's request. O/C--Overcollateralization.

Chart 12 shows the breakdown of the average target credit enhancement levels compared to available credit enhancement across countries. We define the target credit enhancement as the overcollateralization commensurate with the maximum collateral-based uplift.

German programs on average have comparable credit and market risk compared to peer countries. Consequently, the available credit enhancement is also comparable relative to other peer countries.

Chart 12


Scenario Analysis: German Covered Bonds Can Withstand Substantial House-Price Corrections

In light of the current economic environment, we have carried out a scenario analysis with large drops in house prices to gauge whether these would affect the overcollateralization that is commensurate with our ratings. We have tested this scenario analysis for house-price drops of 10% and 20%, similar to what occurred in Eastern Germany after the reunification when more than one million of the East German population immigrated to West Germany. In the mid-90s, house prices decreased within three years by about 15%, and shortly after the 2000s, the accumulated price drop was roughly 20%.

Table 7 shows the impact of the house-price declines on our weighted-average loss severity calculation. The overcollateralization in line with the current rating does not increase significantly. These hypothetical price drops do not affect the achievable rating on any of the programs either.

Table 7

Effect Of House Price Decline On Rated German Covered Bond Programs
Wuestenrot Bausparkasse AG DZ HYP AG Deutsche Apotheker-und Aerztebank eG
House price haircut
Base case
WALS (%) 6.80 32.80 26.92
'AAA' credit risk (%) 6.75 8.20 6.66
Target credit enhancement (%) 9.08 10.31 9.09
Overcollateralization commensurate with rating (%) 7.92 8.20 6.66
WALS (%) 6.80 33.69 28.56
'AAA' credit risk (%) 6.75 8.41 7.12
Target credit enhancement (%) 9.08 10.50 9.55
Overcollateralization commensurate with rating (%) 7.92 8.41 7.12
WALS (%) 7.36 34.97 32.40
'AAA' credit risk (%) 6.80 8.70 8.20
Target credit enhancement (%) 9.13 10.79 10.64
Overcollateralization commensurate with rating (%) 7.97 8.70 8.20
*Floor to the AAA rating is 2.5% credit enhancement. WALS--Weighted-average loss severity. Source: S&P Global Ratings.

Transaction Updates

Related Criteria

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Casper R Andersen, Frankfurt (44) 20-7176-6757;
Secondary Contact:Andreas M Hofmann, Frankfurt + 49 693 399 9314;

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