DBRS Confirms Deutsche Bank AG Conditional Pass-Through Structured Covered Bonds Guaranteed by SCB Alpspitze UG at AAA

DBRS Ratings Limited (DBRS) confirmed its AAA ratings on the outstanding series issued under the Deutsche Bank AG (DB AG or the Issuer) Conditional Pass-Through Structured Covered Bonds Programme (CPT SCB or the Programme). The Programme is guaranteed by SCB Alpspitze UG. The confirmation follows the completion of a full review of the Programme.

There are two outstanding series in the Programme: Series 1 (CB1 - XS1523191697) and Series 2 (CB2 - XS1532501464). Together, they total a nominal amount of EUR 7.0 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, one notch below the Long-Term Critical Obligations Rating (COR) of Deutsche Bank AG. Deutsche Bank AG is the Reference Entity (RE) for the programme. Deviating from the “Rating European Covered Bonds” methodology, DBRS assigned a CBAP that is one notch below the COR even if the Programme can be seen as strategic for the funding of the primary activity of the RE.
-- A “Very Strong” Legal and Structuring Framework (LSF) Assessment associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (high), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- A LSF-L of AA (high).
-- A one-notch uplift for good recovery prospects.
-- A level of overcollateralisation (OC) of 23.6% that DBRS gives credit to, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85.

The transaction was analysed using DBRS’s European Covered Bond Cash Flow Tool. 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 was assumed 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, all else unchanged, the ratings of the covered bonds would be downgraded if any of the following occurred: (1) the CPCA was downgraded below A (high); (2) the LSF assessment associated with the Programme was downgraded; (3) the quality of the cover pool (CP) and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects; (4) the assumed concentration of commercial real estate (CRE) loans and foreign currency exposure of the cover pool were to change adversely.

As at 7 November 2017, the aggregated outstanding balance of the CP was EUR 13.3 billion and composed entirely of retail loans. At that time, the total amount of liabilities outstanding was EUR 7.0 billion, yielding a current OC ratio of 90.3%. The Issuer has publicly committed to maintain an OC level of 16.0%.

The CP comprised 127,224 residential mortgage loans with a weighted-average (WA) current unindexed loan-to-value ratio of 83.6% and a WA seasoning of 55 months. Geographically, the pool is mainly distributed in the German regions of Nordrhein-Westfalen (34.4% by outstanding balance), Baden-Wuerttemberg (9.8%) and Hessen (7.2%). Almost all (roughly 99%) of the retail pool yields a fixed coupon and 68% is fully amortising.

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 analysis. When the property value was zero or not reported, a conservative loan-to-value ratio has been assumed.

As the issuer expects to incorporate in the CP, for certain CRE loans DBRS included additional stressed assumptions in its asset and cash flow analysis, yielding more conservative results. DBRS assumed a CP split of approximately 6% CRE and 94% retail loans. DBRS further assumed that approximately 84% of the CRE pool would be denominated in GBP and consequently incorporated currency devaluation stresses in its analysis, up to 50% in an 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 of mostly fixed-rate loans and the CBs, which are entirely floating rate indexed to EUR 1M, and a swap counterparty is appointed 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.

According to its rating methodology, DBRS has assessed the LSF related to the Programme as “Very Strong.” For more information, please refer to DB AG SCB Rating Report published on: 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 to the rating is: “Rating European Covered Bonds.”

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the legal 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 DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of data and information used for this rating include loan-by-loan data on the CP, stratified tables and historical default performance data provided by the Issuer.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

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

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 14 December 2016, when DBRS assigned an AAA rating to Series 2.

The lead analyst responsibilities for this transaction have been transferred to Roger Bickert.

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

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 and US regulations only.

Lead Analyst: Roger Bickert, Vice President
Rating Committee Chair: Vito Natale, Head of EU RMBS & CBs
Initial Rating Date: 15 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
-- DBRS Criteria: Guarantees and Other Forms of Support
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- 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
-- Rating CLOs and CDOs of Large Corporate Credit
-- European CMBS Rating Methodology
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

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