articles Ratings /ratings/en/research/articles/211011-german-covered-bond-market-insights-2021-12118845 content esgSubNav
In This List
COMMENTS

German Covered Bond Market Insights 2021

COMMENTS

European RMBS Market Update Q3 2021

Root & Branch - November 2021: Sustainable Linked Markets

COMMENTS

Weekly European CLO Update

Take Notes- An Overview Of The 2021 German, Swedish, And Danish Covered Bond Markets


German Covered Bond Market Insights 2021

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.

Overview: COVID-19 And ECB Affect The Pfandbrief

Similar to that of other European markets, 2020 continued to be a challenging year for covered bond issuance in Germany. Year-to-date German investor-placed benchmark covered bond issuance is about 37% lower than the total 2020 level. Today the German covered bond market is the second-largest after Denmark and the largest euro benchmark market, with outstanding issuances totaling €375 billion as of H1 2021.

Chart 1

image

Chart 2

image

Overall, in 2021 we expect German investor-placed benchmark covered bond issuance to be lower than in 2020. This is due to issuers' continued access to competitively priced central bank funding--which steered some banks toward retained, rather than investor placed, covered bond issuances--and growth in bank deposits due to reduced consumer spending.

Transposition of EU's covered bond directive accomplished, but challenges remain

On April 15, 2021 the German Bundestag passed the Covered Bonds Directive Implementation Act (CBDUmsetzungsgesetz, CBDUmsG), aimed primarily at implementing the EU's Covered Bonds Directive into Germany´s Pfandbrief Act (Pfandbriefgesetz, PfandBG) and making adjustments to reflect changes to article 129 of the Capital Requirements Regulation (CRR). On May 7, 2021 the second reading in the Bundesrat took place, making Germany the first country to complete the parliamentary procedure for implementation of the EU's Covered Bonds Directive.

The main changes to the PfandBG include, amongst others: the introduction of an option for the cover pool administrator to extend the maturities of an insolvent issuer's covered bonds by up to one year; an additional nominal statutory overcollateralization (OC) requirement of 2% for mortgage and public sector covered bonds and 5% for ship and aircraft covered bonds; derivative eligibility amendments; amendments to provisions for the liquidity buffer and the cover pool monitor's reporting duty; and the expansion of transparency provisions.

Article 1 of the CBDUmsG, which includes the option to extend the maturities of covered bonds, entered into force on July 1, 2021. Article 2 CBDUmsG, including provisions on implementing the CBD, will enter into force on July 8, 2022.

We understand that the wording of the extension is currently being processed by German covered bond issuers. The deadline to include program documentation updates for new issuances is May 2022. The current documentation for outstanding bonds will not be amended.

We continue to view the German covered bond legal framework as very strong. These changes have no impact on our ratings on German covered bonds.

Concerns raised over valuations

The Association of German Pfandbrief banks (VDP) has expressed concerns regarding the Beleihungswertermittlungsverordnung (BelWertV)-–the German valuation regulation--which it considers too conservative and which may limit the use of covered bonds for funding of residential real estate. The BelWertV limits the valuations used for covered bond issuance and--combined with loan-to-value (LTV) limits of 60% (lower than the directive's 75%)--severely limits issuers' use of residential mortgage collateral in German covered bonds. In our opinion, stringent valuation limits are one reason for German covered bond issuers' higher percentage of commercial real estate as collateral for cover bonds compared to other countries.

COVID-19 has had a limited impact on loan performance and sustainable covered bonds support issuance

The German housing market strongly weathered the COVID-19 pandemic, partly due to pandemic policy measures in Europe, protecting workers' jobs and income, short-time work and furlough schemes which avoided a wide economic downturn. Germany has extended such measures until year end 2021. Despite lower issuance, green covered bonds continue to gain importance for German covered bond issuers.

Germany's Covered Bond Framework: Will Harmonization Bring Growth?

German covered bonds are issued on the basis of the PfandBG and The Regulation on the Determination of the Mortgage Lending Value. The PfandBG came into force in 2005 and has been amended on several occasions. In May 2021 Germany's Bundesrat approved amendments to the PfandBG, completing the parliamentary procedure for implementation of the EU's Covered Bonds Directive.

In addition to the main legal framework, we understand that three issuer-specific frameworks will continue to allow for the issuance of covered bonds: DZ-Bank covered bonds, DSL covered bonds, and Landwirtschaftliche Rentenbank covered bonds. We expect these frameworks to continue to align with the main legal framework

The PfandBG provides for covered bonds to be backed by: mortgage loans (Hypothekenpfandbriefe), public sector debt (Öffentliche Pfandbriefe), ship mortgages (Schiffspfandbriefe), or aircraft mortgages (Flugzeugpfandbriefe). These must each be included in separate cover pools. The majority of German covered bonds are backed by either public sector loans (about 34% of total outstanding covered bonds) or mortgage loans (approximately 66% of total outstanding covered bonds). For each of these collateral types, the German covered bond law defines the eligibility criteria, loan characteristics, and eligible jurisdictions.

Chart 3

image

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, 2015, 2021 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; from July 8, 2022: 2% nominal for mortgage and public sector covered bonds; 5% nominal for ship and aircraft covered bonds 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, covered bond issuers are subject to supervision by the Federal Financial Supervisory Authority (BaFin) to ensure compliance with the covered bond law. BaFin appoints an independent cover pool monitor to ensure the cover pool register is maintained at all times. Derivatives are eligible for inclusion in the cover pool under certain conditions and limitations. Payments to counterparties rank equal to payments due to covered bondholders.

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 based on the mortgage lending value ("Beleihungswert"), a conservative valuation based on long-term considerations, and which by definition cannot exceed the current market price. The new legislation will maintain the lending limits, which has raised some concern for limited growth in residential mortgage loans as security for covered bonds.

Overcollateralization, liquidity buffer, and maturity extension

The May 2021 amendments to the PfandBG introduced an additional nominal statutory OC requirement of 2% for mortgage and public sector covered bonds and 5% for ship and aircraft covered bonds effective July 8, 2022.

The PfandBG still also requires issuers to hold a liquidity buffer that covers maximum net liquidity outflow over the next 180 days.

One of the main amendments to the PfandBG is the introduction of an option for the cover pool administrator to extend the covered bonds' maturities of an insolvent issuer by up to one year. The maturity extension cannot affect the ranking of covered bond investors or invert the sequencing of the covered bond programs' original maturity. Maintaining the original payment sequence of outstanding covered bonds may be a challenging exercise in our opinion, and will likely lead to further extensions, since extending one bond may require extension of other bonds due within the extension period.

Our rating analysis will consider the extended maturity of the covered bonds, which could help improve the observed mismatch between assets and liabilities--particularly for residential mortgage programs with traditionally higher asset-liability mismatches. For public sector programs, which traditionally have lower asset liability mismatches, we expect the effect to be limited.

Accordingly, we anticipate that a maturity extension may affect the overcollateralization commensurate with the maximum collateral-based uplift (see also "Approach To Analyzing German Covered Bonds Clarified Following Changes To The German Covered Bond Law," published on Oct. 6, 2021).

Commingling risk

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 potential commingling risk.

Chart 4

image

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/-- 2,213.6 Hard bullet 89.6% residential, 1.3% commercial, 9.1% substitute assets Link Link
DZ HYP AG - Mortgage Sector Program A+/Stable/A-1 AAA/Stable/A-1+ 33,630.7 Hard bullet 56.2% residential, 41.3% commercial, 2.5% substitute assets Link Link
Deutsche Apotheker-und Aerztebank eG A+/Stable/A-1 AAA/Stable/-- 7,995.1 Hard bullet 77.7% residential, 18.2% commercial, 4.1% Substitute assets Link Link
Public covered bond programs
DZ Hyp - Public Sector Covered Bond program A+/Stable/A-1 AAA/Stable/-- 12,332.1 Hard bullet 100.0% public sector Link Link
DZ BANK AG Deutsche Zentral-Genossenschaftsbank A+/Stable/A-1 AA+/Stable/A-1+ 11,557.1 Hard bullet 0.03% mortgages, 11.2% public sector, 1.7% substitute assets, 87.2% other Link Link
NRW Bank AA/Stable/A-1+ AAA/Stable/-- 1,502.8 Hard bullet 100% public sector N/A Link
*Except for NRW Bank, as reported by the issuer in the June 2021 HTT report. N/A--Not applicable.

Mortgage Market Overview: German Housing Market Maintains Momentum

We anticipate Germany's economy will grow by 3.1% in 2021 and 5% in 2022, after a 4.9% contraction in 2020. Increasing vaccination rates will result in further lifting of restrictions, which leads to a boost in private consumption. Furthermore, the boost to investment across Europe from the Next Generation EU plan should lead to higher demand for German industrial products and exports. However, the main risks stem from the impact of COVID-19 variants and financing conditions when central banks reduce their bond purchases.

In line with the observed recovery, we expect unemployment to decline from the current level of around 4% to 3.5% in 2022 and 3.4% in 2023.

Table 3

Economic Indicators
Year Real GDP growth (%) Unemployment rate (%) Nominal house prices (%)
2019 1.1 3.2 6.4
2020 (4.9) 3.9 6.9*
2021f 3.1 3.7 5.3
2022f 5.0 3.5 4.9
2023f 2.1 3.4 4.5
Source: S&P Global Ratings. f--Forecast. *--Estimate.

Chart 5

image

Property market outlook: House prices should increase more slowly in 2021

House prices exceeded 6% in 2020 and are expected to growth 5% in 2021. The expected sustained economic and employment recovery will support the housing market beyond 2021, with house prices expected to grow by 4.9% in 2022 and by 4.5% in 2023. The search for yield will continue to generate investor demand in large cities and investor-based markets, especially in Germany, where housing prices are still catching up with the rest of Europe.

House prices in Germany are also supported by population growth, which, despite low birth rates and high death rates, continue to increase due to positive net migration (see chart 7). Growing immigration will continue to support German house prices, particularly in urban areas (see chart 8). The top 10 largest German cities have recorded positive growth in population from 2009-2020. Strongest growth is observed in Leipzig, Munich, and Frankfurt. In the same period, the total population increased at a much lower rate of 1.7%. We expect growing urbanization in Germany to continue to support demand for housing despite COVID-19, with stable house prices in the bigger cities at least.

Chart 6

image

Chart 7

image

Chart 8

image

Features Of German Covered Bond Programs

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 Q2 2021 As of Q1 2020 As of Q3 2018 As of Q2 2017 As of Q4 2011
DZ HYP Hypf 33,630.70 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 30,036.90 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 28,721.90 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 22,127.30 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 21,872.70 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 18,998.40 Bayern LB Oepf 18,472.5 Deutsche Pfandbriefbank Hypf 16,066.0 Deutsche Pfandbriefbank Hypf 14,904.4 Bayern LB Oepf 29,670.0
Berlin Hyp Hypf 16,368.70 Deutsche Pfandbriefbank Hypf 16,365.0 Nord LB Oepf 15,921.3 Commerzbank Hypf 14,869.6 Unicredit Bank AG Hypf 25,431.5
Deutsche Pfandbriefbank Hypf 16,295.00 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 12,332.10 DZ HYP Oepf 13,382.2 HELABA Oepf 15,020.5 HELABA Hypf 12,054.5 Nord LB Oepf 19,811.0
Commerzbank Oepf 12,172.90 HELABA Hypf 12,261.5 Berlin Hyp Hypf 13,892.7 LBBW Hypf 11,758.0 WL Bank Oepf 19,788.6
Total 212,556.60 205,628.7 184,490.0 156,971.2 296,541.4
Hypf--Mortgage. Oepf--Public sector.

Chart 9

image

Green Covered Bonds And ESG Considerations

As one of the largest covered bond markets, we expect German covered bond issuers to be on the forefront of the developments within this growing segment. Since 2019, the Association of German Pfandbrief banks (VDP) has maintained the minimum standards for Green Pfandbriefe. Furthermore, the VDP has established minimum standards for social covered bonds that build on existing green and social standards. Participating banks are planning further product development.

Environmental and social credit factors are typically credit neutral in our analysis of German mortgage covered bonds. While we typically consider social factors to be a credit positive in the assessments of the public sector entities included in public sector cover pools. The German Pfandbrief law requires the coverage of 180 days liquidity. Issuers are not committed to maintain a minimum level of OC in the program. While this does not affect our ratings on the bonds, it reduces the number of unused notches which provides protection in the event of an issuer downgrade.

Climate Risk Vulnerability

Extreme weather events such as heavy rainfall and heatwaves are becoming more frequent. In July 2021, severe weather conditions resulted in some of the worst flooding catastrophes seen in Germany. Heavy rain and flooding led to significant damages mainly in the German states of North Rhine-Westphalia, Rhineland-Palatinate, and Bavaria. The total damages are estimated to be about €7 billion. Of that sum, €6.5 billion alone is for residential buildings, households, and businesses.

Although most properties affected may have residential building insurance, natural risk insurance is not a common feature of household insurance in Germany. According to the Gesamtverband der Deutschen Versicherungswirtschaft (GDV), only 47% of properties in North Rhine-Westphalia and 37% of properties in Rhineland-Palatinate are secured against natural risk.

In response to severe damages, the German government has established a €30 billion reconstruction fund. From this sum, €2 billion will be used for infrastructure reconstruction, with the remaining €28 billion to be distributed amongst impacted states according to the damages caused (54.4% to Rhineland-Palatinate, 44.0% to North Rhine-Westphalia, 1% to Bavaria, and 0.48% to Saxony). Impacted homeowners, companies, and other facilities are expected to receive a compensation up to 80% of the total damage. In more severe cases it is possible to receive 100%.

We do not expect the damages linked to the current flooding to have any impact on the rating of our rated mortgage covered bonds. Although losses are significant, the affected regions make up a limited part of the diversified loan portfolios constituting the security for covered bonds. Compared to the overall size of the cover pool, we expect losses to be manageable also considering the strong government support for the borrowers.

Comparison Of German Covered Bond Programs

As shown in chart 10B, the share of German assets backing covered bonds varies across issuers. While most issuers focus on assets sourced in Germany, some include mainly non-German assets in their cover pools. Our collateral support analysis is performed using the respective criteria for the underlying asset type, while our resolution regime and jurisdictional support analysis reflects the issuer's jurisdiction.

As chart 10A shows, the share of commercial assets also varies significantly across issuers. While we believe that commercial real estate asset performance may deteriorate, we do not anticipate this significantly impairing the credit quality of the German mortgage covered bonds that we rate. This is because of the availability of credit enhancement to absorb losses.

Chart 10A

image

Chart 10B

image

Chart 11

image

Table 5

German Covered Bond Programs--Key Characteristics
German mortgage covered bond programs Long-term issuer credit rating Covered bond rating Outstanding covered bonds (mil. €)* Maturity profile* Collateral type* Link to surveillance report Link to transaction update Outstanding assets (mil. €)* No. of loans* WA LTV (%)* WA seasoning (months)* Interest rate type* Repayment type* WAFF (%) WALS (%) Available credit enhancement (%) Target credit enhancement (%) 'AAA' credit risk (%) OC consistent with the current rating (%) Unused notches
Program
Wuestenrot Bausparkasse AG A-/Stable/A-1 AAA/Stable/-- 2213.6 Hard bullet 89.6% residential, 1.3% commercial, 9.1% substitute assets Link Transaction update 2,746 34,257 45.1 125.88 99.1% fixed, 0.9% floating 70.8% amortizing, 29.2% bullet/IO 10.34 9.02 20.14 8.84 6.31 7.58 2
DZ HYP AG - Mortgage Sector Program A+/Stable/A-1 AAA/Stable/A-1+ 33,630.7 Hard bullet 56.2% residential, 41.3% commercial, 2.5% substitute assets Link Transaction update 38,424.5 109,140 50 58.56 88.8% fixed, 11.2% floating, other 0.0% 74.4% amortizing, 25.6% bullet/IO, 0.0% other 19.87 30.97 14.25 9.1 7 7 4
Deutsche Apotheker-und Aerztebank eG A+/Stable/A-1 AAA/Stable/-- 7,995.10 Hard bullet 77.7% residential, 18.2% commercial, 4.1% Substitute assets Link Transaction update 8,810.10 83,141 55.1 65.04 92.5% fixed, 7.5% floating 67.2% amortizing, 29.9% bullet/IO, 3.0% other 21.55 27.18 10.83 7.03 5.25 5.25 4
German public sector covered bond programs Long-term issuer credit rating Covered bond rating Outstanding covered bonds (mil. €)* Program type* Collateral type* 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 (%) OC consistent with the current rating (%) Unused notches
Program
DZ Hyp - Public Sector Covered Bond program A+/Stable/A-1 AAA/Stable/-- 12,332.15 Hard bullet 100.0% public sector Link Transaction update 14,556.80 100 23.6 A- 18.04 14.24 10 10 4
NRW Bank AA/Stable/A-1+ AAA/Stable/-- 1,502.80 Hard bullet 100% public sector N/A Transaction update 2,141.40 100 80.44 B 42.49 126.59 16.58 16.58 1
DZ BANK AG Deutsche Zentral-Genossenschaftsbank A+/Stable/A-1 AA+/Stable/A-1+ 11,557.05 Hard bullet 0.03% mortgages, 11.2% public sector, 1.7% substitute assets, 87.2% other Link Transaction update 18,240.30 11 N/A N/A 65.92 WH WH 5.19 2
Note: This table can be expanded on www.capitaliq.com 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 June 2021 HTT report. WA--Weighted-average. LTV--Loan-to-value. WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. N/A--Not applicable. WH--Withheld at the issuer's request. OC--Overcollateralization.

Chart 12

image

Ratings Outlook: Unused Notches Mitigate Bank Downgrade Risk

The German covered bonds which we rate are issued by highly-rated issuers, which are the first recourse for bondholders. As a result, most of our rated German covered bond programs benefit from multiple unused notches of ratings uplift, which protect the ratings on the covered bonds if the issuer is downgraded.

On June 24, 2021 we downgraded various German banks including the Cooperative Banking Sector (see "Various German Banks Downgraded On Persistent Profitability Challenges And Slow Digitalization Progress"). This rating action did not affect our ratings on the covered bonds issued by Deutsche Apotheker- und Aerztebank eG, the public sector and mortgage covered bonds issued by DZ Hyp AG, and DZ Briefe issued by DZ Bank AG (see "German Cooperative Banking Sector Downgrade Does Not Affect Ratings On Four Covered Bond Programs," published on June 28, 2021).

Chart 13

image

Table 6

German Covered Bond Programs--Credit Enhancement
Program Available credit enhancement (%) Target credit enhancement (%) 'AAA' credit risk (%) OC consistent with the current rating (%) Unused notches
Mortgage covered bond programs
Wuestenrot Bausparkasse AG 20.14 8.84 6.31 7.58 2
DZ Hyp AG - Mortgage Sector CB Program 14.25 9.1 7 7 4
Deutsche Apotheker- und Aerztebank eG 10.83 7.03 5.25 5.25 4
Public Sector Covered Bond Programs
DZ Hyp AG - Public Sector CB Program 18.04 14.24 10 10 4
NRW Bank 42.49 126.59 16.58 16.58 1
DZ BANK AG Deutsche Zentral-Genossenschaftsbank 65.92 WH WH 5.19 2
WH--Withheld at the issuer's request. OC--Overcollateralization.

Chart 14 shows the breakdown of the average target credit enhancement levels of mortgage and public sector covered bond programs compared to the available credit enhancement across countries. We define the target credit enhancement as the OC commensurate with the maximum collateral-based uplift.

Chart 14

image

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

Despite the currently strong housing market, we have carried out a scenario analysis with large drops in house prices to gauge their impact on the final rating outcome or the OC commensurate with the current ratings on the covered bonds. We have tested the impact for house-price drops of 10% and 20%, similar to what we observed in Eastern Germany after the reunification when more than one million of the East German population immigrated to West Germany. In the mid-1990s, 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 house-price declines on the weighted-average loss severity calculation for our rated mortgage programs. The OC in line with the current rating would not increase significantly. Additionally, these hypothetical price drops would not decrease the maximum achievable rating on any of the mortgage covered bond programs.

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 (%) 9.02 30.97 27.18
'AAA' credit risk (%) 6.31 7.00 5.25
Target credit enhancement (%) 8.84 9.10 7.03
Overcollateralization commensurate with rating (%) 7.58 7.00 5.25
10%
WALS (%) 9.42 31.44 28.81
'AAA' credit risk (%) 6.35 7.10 5.61
Target credit enhancement (%) 8.88 9.19 7.39
Overcollateralization commensurate with rating (%) 7.62 7.10 5.61
20%
WALS (%) 10.70 32.50 32.73
'AAA' credit risk (%) 6.48 7.33 6.47
Target credit enhancement (%) 8.99 9.41 8.28
Overcollateralization commensurate with rating (%) 7.74 7.33 6.47
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 Analysts:Natalie Swiderek, Madrid + 34 91 788 7223;
natalie.swiderek@spglobal.com
Andreas M Hofmann, Frankfurt + 49 693 399 9314;
andreas.hofmann@spglobal.com
Secondary Contact:Casper R Andersen, Frankfurt + 49 69 33 999 208;
casper.andersen@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back