Morningstar DBRS Confirms AAA Credit Ratings on Sparkasse zu Lübeck AG Covered Bonds (Pfandbriefe - Mortgages)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA credit ratings on the Series 3 Pfandbriefe (the German legislative covered bonds) issued under the Sparkasse zu Lübeck AG (SKL or the Issuer) Mortgage Pfandbrief programme (SKL CB or the programme). The credit rating action follows Morningstar DBRS' full review of the programme.

There are 54 series of Pfandbriefe outstanding under the programme, totalling a nominal amount of EUR 540 million.

CREDIT RATING RATIONALE

The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). SKL is the Issuer and reference entity for the programme. There is no Critical Obligations Rating associated with SKL, 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 Long-Term 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 uplift for recovery prospects.
-- A level of overcollateralisation of 32.7%, to which Morningstar DBRS gives credit, and it is the minimum level observed in the past 12 months adjusted by a scaling factor of 0.85.
-- 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 ratings.

In addition, all else unchanged, the CB ratings would be downgraded 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 A (high); (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 30 September 2024, the aggregated outstanding balance of the CP underlying the Issuer's Pfandbriefe comprised EUR 767 million of residential (78.5% of the loan balance) and commercial (18.9%) mortgages, plus EUR 20 million of other assets (Länderanleihen, state bonds issued by federal states). These other assets are held in a deposit account that is not contractualised, and there is no replacement trigger consistent with Morningstar DBRS' "Legal and Derivative Criteria for European Structured Finance Transactions" methodology. Therefore, Morningstar DBRS gives 40% credit to these assets, leading to a total considered CP of EUR 755 million, which results in a total OC of 40.7%.

As of September 2024, the mortgage CP assets comprised 5,095 mortgage loans, with a WA seasoning of 81 months and a WA remaining time to maturity of 240 months. The CP is located mainly in Schleswig-Holstein (80.6% by outstanding balance), Hamburg (14.4%), and Mecklenburg-Western Pomerania (4.0%).

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. The total pool presents a WA LTV of 52.6% based on lending values (determined as prescribed in the Beleihungswertermittlungsverordnung, BelWertV), and of 38.3% based on market values.

SKL 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 (9.3% floating rate linked to three-month Euribor with quarterly resets). 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 assets to be roughly 12 years based on a 0% prepayment rate, which is longer than the 5.5 years of WA life on the Pfandbriefe, not accounting for any maturity extension. This risk is mitigated by the available OC.

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 www.dbrsmorningstar.com.

For further information on the programme, please refer to the rating report at www.dbrsmorningstar.com.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 the Issuer are likely to have an impact on this credit rating.

There were no Environmental/Social/Governance factor(s) 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 Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781

Notes:
All figures are in Euros unless otherwise noted.

The principal methodologies applicable to the credit rating are: "Global Methodology for Rating and Monitoring Covered Bonds" (2 April 2024) https://dbrs.morningstar.com/research/430636 and "Common RMBS Rating Methodology" (18 October 2024) https://dbrs.morningstar.com/research/441432.

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 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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for this credit rating include the investor reports and stratified data on the CP as at 30 September 2024, and static defaults by vintage of origination, spanning from Q1 2011 to Q4 2023, 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 rating, 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 this credit rating 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 19 January 2024, when Morningstar DBRS confirmed the AAA credit rating on the series 3 and discontinued the credit rating on the series 4.

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 https://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.
This credit rating is 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: 24 January 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259]

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 (4 June 2024),
https://dbrs.morningstar.com/research/433881
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024),
https://dbrs.morningstar.com/research/443196
-- Common RMBS Rating Methodology (18 October 2024),
https://dbrs.morningstar.com/research/441432
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024),
https://dbrs.morningstar.com/research/439913
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024),
https://dbrs.morningstar.com/research/439571
-- Global Methodology for Rating CLOs and Corporate CDOs (19 November 2024),
https://dbrs.morningstar.com/research/443207.
-- Rating CLOs Backed by Loans to European SMEs (19 November 2024) and SME Diversity Model v.2.7.1.5, https://dbrs.morningstar.com/research/443198.
-- Global Methodology for Rating Sovereign Governments (15 July 2024),
https://dbrs.morningstar.com/research/436000
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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/439604.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.