DBRS Assigns AAA Rating to Deutsche Bank AG Conditional Pass-Through Structured Covered Bonds Guaranteed by SCB Alpspitze UG, Series 2

DBRS Ratings Limited (DBRS) has today assigned a AAA rating to the Series 2 issued under the Deutsche Bank AG (DB AG) Conditional Pass-Through Structured Covered Bonds Programme (CPT SCB or the Programme) guaranteed by SCB Alpspitze UG. Series 2 is a EUR 1 billion floating-rate bond linked to three-month Euribor +0.50% and maturing on 14 December 2020. The Programme size is EUR 35 billion.

At the same time, DBRS has confirmed its AAA rating on the Series 1 outstanding under the Programme.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, being one notch below the Long-Term Critical Obligations Rating (LT COR) of DB AG. DB AG is the Issuer and Reference Entity (RE) for the Programme. As a deviation to its “Rating European Covered Bonds” methodology (the Methodology), DBRS has set the CBAP one notch below the COR, even if the Programme can be assumed to be strategic for the funding of the primary activity of the RE.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (high), being the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA (high).
-- A one-notch uplift for good recovery prospects.
-- A contractually committed level of overcollateralisation (OC) of 16% on a nominal basis that the Issuer commits to in its investor reports, to which DBRS gives full credit.

The transaction was modelled with DBRS’s European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and foreign currency stresses. In accordance with the “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios, ranging between a 1% and 20% Prepayment Rate.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch.

In addition, the ratings of the Programme would be downgraded if any of the following occurs: (1) the CPCA were downgraded below A (high), (2) the LSF Assessment associated with the Programme were downgraded, (3) the quality and consistency of the cover pool (CP) were no longer sufficient to support a one-notch uplift for good recovery prospects, (4) the assumed commercial real estate (CRE) loans concentration and foreign currency exposure of the cover pool changed adversely.

The CBs are unsubordinated obligations of DB AG and will rank pari passu among themselves and pari passu with all other unsubordinated obligations of the Issuer. SCB Alpspitze UG, the special-purpose vehicle Guarantor, has given an unconditional and irrevocable guarantee for the payments of principal and interest on the CBs. Payments under the guarantee are secured over a pool of mortgage loans (and related collateral) that have been and will be transferred to the Guarantor by the Sellers. DB AG, Deutsche Bank Privat- und Geschäftskunden AG (DB PGK) and Deutsche Bank Bauspar AG (DB Bauspar) act as Sellers and Servicers within the Programme. Loans and related collateral transferred to the Guarantor are registered in the Refinancing Register of the Sellers. The Guarantor holds a transfer claim in relation to each Register and, if so instructed by the Trustee, it will demand the full transfer of any of the receivables (and related collateral) in the Register. The pool of loans, along with any eligible investments and balance standing to the credit of any of the guarantor accounts, forms the CP. Following the occurrence of a Guarantee Event, all funds resulting from the CP are available, subject to the priority of payments being applied, to satisfy the obligations of the Guarantor under the guarantee.

Before the occurrence of a Guarantee Event, virtually all flows of funds are netted, and there is no money accumulating on the Guarantor accounts, except for certain reserves. Following the occurrence of a Guarantee Event, cash flows are no longer netted and money accumulating on the Guarantor accounts is paid out on a monthly basis according to the priority of payments. Funds only need to be paid out to the extent they are available. As such, the CBs effectively switch to a pass-through payment structure with a maturity tailored on the amortisation of the CP.

Should the Issuer be subject to certain resolution measures under Regulation (EU) No 806/2014 (SRM Regulation) and the German Recovery and Resolution Act, DBRS understands that there is a risk that the Issuer’s obligation to pay under the CB would be written down or written off if (1) the cash flows produced from the CP are deemed insufficient to back the amounts due under the guarantee or (2) the CB are not classified as secured liabilities of the Issuer. The OC to which DBRS gives credit is currently sufficient to support the assigned CB ratings. A Coverage Ratio Test hard coded in the documentation aims at ensuring a minimum OC of 2% based on cover value and 16% on a nominal basis. The test is calculated on the issuance amount, without any impairment or reduction that could result from the application of resolution measures.

However, in DBRS’s view, given that the regulation is untested, should the issuer be subject to resolution measures, the risk that the CB are not classified as secured liabilities of the Issuer is not negligible. In such case, the Guarantee agreement provides for the guarantee to remain in force for the full amount originally undertaken, without any impairment or reduction. Should payments executed by the Issuer at the payment date be insufficient to cover payment of interest and/or principal on the CB according to the original amount (without any impairment or reduction), a guarantee event would be triggered and the payment obligation would switch to the Guarantor. DBRS considers this probability to be higher than what the probability of switching the payment obligations of the Issuer to the CP would be under a legislative CB, and has therefore set the CBAP for the Programme one notch below the LT COR of the Issuer. This is a deviation to the Methodology.

As of December 2016, the total CP balance was EUR 13.178 billion (composed entirely of retail loans). Including Series 2, the total amount of bonds outstanding is EUR 9.5 billion, yielding a nominal OC ratio of 38.7%.

The retail pool is formed of mortgage loans and home loans. Home loans are backed by a property and saving plan or other investments. No value has been given to investments, saving plans or liquidity within DBRS modelling. When the property value was zero or not reported, a conservative loan-to-value ratio has been assumed. The pool is relatively young, with a WA seasoning of four years and a WA CLTV of 86.7%. 99% of the retail pool yields a fixed coupon. 70% is fully amortising. All retail loans are denominated in euros.

As the issuer expects to incorporate certain CRE loans in the CP, DBRS has included additional stressful assumptions in both asset and cash flow analysis, which yield more conservative results. DBRS has assumed a CP split of approximately 9% CRE and 91% retail loans. DBRS has further assumed approximately 84% of the CRE pool to be denominated in GBP and has incorporated currency devaluation stresses in its analysis, up to 50% in a AAA stress scenario.

Upon the Issuer’s COR being downgraded below “A”, a swap reserve is put in place for an amount sufficient to cover the mark to market of a fixed-floating swap to cover the mismatch between the cover pool (mostly fixed) and the CB (entirely floating rate indexed to EUR1M post-guarantee event). DBRS has given a high but not full value to such a swap in its analysis. The theoretical swap yields 75 basis points (bps) above EURIBOR, whereas the CB pay 50 bps above EURIBOR.

As of December 2016, the weighted-average (WA) life of the CP was approximately 18 years, which is longer than the three years expected maturity of the CB. This risk is mitigated by the Conditional Pass-Through structure.

DBRS has assessed the LSF Assessment related to DB AG SCB as “Very Strong”, according to its rating methodology. For more information, please refer to DB AG SCB Rating Report published on our website: http://www.dbrs.com/research/303340/deutsche-bank-a-g-conditional-pass-through-structured-covered-bonds-structured-mortgages-rating-report.pdf

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: “Rating European Covered Bonds.” This can be found at http://www.dbrs.com/about/methodologies.

In DBRS’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis was not conducted. A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 2. All the other documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

The sources of information used for this rating include loan by loan data, stratified tables and performance data spanning from 2010 to 2015 provided by the Issuer that allowed DBRS to further assess the portfolio.

DBRS does not rely upon third-party due diligence in order to conduct its analysis. DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 23 November 2016, when DBRS finalised the provisional AAA rating on Deutsche Bank AG Conditional Pass-Through Structured Covered Bonds Guaranteed by SCB Alpspitze UG.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

The lead responsibilities have been transferred to Alessandra Maggiora.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 23 November 2016

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- European CMBS Rating Methodology
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings
-- Rating CLOs and CDOs of Large Corporate Credit

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375