Morningstar DBRS Confirms AAA Credit Ratings on Sparkasse Holstein Covered Bonds (Pfandbriefe - Mortgages)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA credit ratings on eight Pfandbriefe (the German legislative covered bonds) issued under the Sparkasse Holstein (SKH or the Issuer) Mortgage Pfandbrief programme (SKH CB or the programme). The credit rating actions follow Morningstar DBRS’ full review of the programme.

There are 22 series of Pfandbriefe outstanding under the programme, totalling a nominal amount of EUR 911 million.

The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). SKH is the Issuer and reference entity for the programme. There is no Critical Obligations Rating associated with SKH, but Morningstar DBRS considers Germany a jurisdiction for which covered bonds (CBs) are a particularly important financing tool. As such, the CBAP is set at the level of the Issuer Rating plus one notch.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the programme.
-- A Cover Pool Credit Assessment (CPCA) of A (high), which is the lowest in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AAA.
-- No committed overcollateralisation (OC). The minimum-observed OC level during the past 12 months is 48.8%. However, Morningstar DBRS gives credit to a limited level of OC equal to 36%, which is considered sustainable based on information from the Issuer and expected market developments.
-- The sovereign rating on the Federal Republic of Germany, rated AAA with a Stable trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction using its European covered bond cash flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses, and market value spreads to calculate liquidation values on the cover pool (CP).

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade on the CB credit ratings.

In addition, all else unchanged, Morningstar DBRS would downgrade the CB ratings if any of the following occurred: (1) the CPCA was downgraded to below A (high); (2) the sovereign rating on the Federal Republic of Germany was downgraded to below AA; (3) the LSF Assessment associated with the programme was downgraded; (4) the relative amortisation profile of the CB and CP moved adversely; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.

As of 31 March 2024, the aggregated outstanding balance of the CP underlying the Issuer’s Pfandbriefe comprised EUR 1,333 million of residential (59.4% of the loan balance) and commercial (36.6%) mortgages, plus EUR 55.5 million of other assets (sovereign and federal state bonds). These other assets are held in a deposit account that is not contractualised, and there is no replacement trigger consistent with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology. Therefore, Morningstar DBRS gives 40% credit to these assets, leading to a total considered CP of EUR 1,356 million, which results in a total OC of 48.8%.

As of March 2024, the mortgage CP assets comprised 5,256 mortgage loans, with a weighted-average (WA) seasoning of 84 months and a WA remaining time to maturity of 209 months. The CP is located mainly in Schleswig-Holstein (51.9% by outstanding balance), Hamburg (35.0%), and Lower Saxony (4.2%).

According to the PfandBG, the mortgage loans may only be registered in the CP for a maximum amount up to 60% of the mortgage lending value of the underlying property (loan-to-value (LTV) limit). In its CP analysis, Morningstar DBRS used the LTVs based on market values. To determine the loss given default (LGD), Morningstar DBRS considered the LTV limit whereas to assess the probability of default (PD) Morningstar DBRS considered LTVs that included the entire mortgage balance secured by the underlying property (whole loan LTV). The total pool presents a WA LTV of 53.9% based on lending values (determined as prescribed in the Beleihungswertermittlungsverordnung, BelWertV), and of 38.8% based on market values.

SKH CB do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (5.5% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders (79.6% floating rate linked to six-month Euribor). The available OC mitigates this risk, which Morningstar DBRS accounted for in its cash flow analysis.

Morningstar DBRS calculated the WA life of the mortgage at approximately 11 years based on a 0% prepayment rate, which is longer than the 5.3 years of WA life on the Pfandbriefe, not accounting for any maturity extension. This risk is mitigated by the extended maturity date, which falls one year after the maturity date, and by the OC in place.

All CP assets and the CBs are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

Morningstar DBRS assessed the LSF related to the programme as “Very Strong” according to its principal methodology. For more information, please refer to Morningstar DBRS’ commentaries “DBRS Publishes Commentary on German Covered Bonds Legal and Structuring Framework” and “German Covered Bonds: Legal and Structuring Framework Review,” both available at http://dbrs.morningstar.com.

For further information on the programme, please refer to the rating report at http://dbrs.morningstar.com.

Morningstar DBRS’ credit ratings on the outstanding covered bonds address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Principal Balance.

Morningstar DBRS’ credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on Sparkassen-Finanzgruppe are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Sparkassen-Finanzgruppe are discussed separately at https://dbrs.morningstar.com/issuers/10051.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: “Global Methodology for Rating and Monitoring Covered Bonds” (2 April 2024), https://dbrs.morningstar.com/research/430636.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar 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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include investor reports; stratified data on the CP as at 31 March 2024; and static arrears and defaults by vintage of origination and dynamic arrears, spanning from Q1 2016 to Q1 2024, provided by the Issuer.

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

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

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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

The last credit rating action on this transaction took place on 12 June 2023, when Morningstar DBRS confirmed its AAA credit ratings on eight Pfandbriefe issued under the programme.

The lead analyst responsibilities for this transaction have been transferred to Alejandro Tendero Delicado.

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alejandro Tendero Delicado, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 7 May 2021

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Tel. +49 (69) 8088 3500
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024),
https://dbrs.morningstar.com/research/430636
-- Global Methodology for Rating Banks and Banking Organisations (15 April 2024),
https://dbrs.morningstar.com/research/431155
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Common RMBS Rating Methodology (15 April 2024),
https://dbrs.morningstar.com/research/431219
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024),
https://dbrs.morningstar.com/research/428544
-- Rating CLOs Backed by Loans to European SMEs (23 February 2024) and DBRS Diversity Model v. 2.6.1.4,
https://dbrs.morningstar.com/research/428543
-- Global Methodology for Rating Sovereign Governments (6 October 2023),
https://dbrs.morningstar.com/research/421590
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

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

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].