FitchRatings MCB - Sparkasse Pforzheim Calw

Covered Bonds
Germany
Sparkasse Pforzheim Calw
Mortgage Covered Bonds
New Issue
Key Rating Drivers
Ratings/Outlook
Mortgage Covered Bonds
‘AAA’/Stable
Rating Rationale
IDR/Outlook
IDR uplift (notches)
D-cap (notches)
Tested rating on a PD
basis
Recovery given default
uplift (notches)
Covered Bonds Rating
OC Fitch considers in
analysis (%)
AAA breakeven OC (%)
‘A+’/Stable
2
4 (Moderate
risk)
‘AA’
2
‘AAA’
100.3
16.0
Discontinuity Risk (D-Cap of 4)
Overall assessment
Asset segregation
Liquidity gap and systemic risk
Systemic alternative
management
Cover pool-specific
management
Privileged derivatives
Moderate
Low
Moderate
Very low
Moderate
Very low
Key Data
Sep 15
Residential and commercial
mortgages
Cover assets (EURbn)
1.083
Covered bonds (EURbn)
0.393
Nominal OC (%)
175.60
WAL of assets (years)
10.8
WAL of liabilities (years)
9.4
Asset type
Ratings Based on Recoveries: Sparkasse Pforzheim Calw’s Long-Term Issuer Default Rating
(IDR) of ‘A+’, reflecting membership of the Sparkassen-Finanzgruppe (SFG) mutual support
group, and the two-notch IDR uplift, result in a floor of ‘AA’ for the Pfandbriefe rating on a
tested probability of default (PD) basis. The overcollateralisation (OC) Fitch takes into account,
at 100.3%, allows for a two-notch recovery uplift and a ‘AAA’ Pfandbrief rating. Therefore, the
assigned Discontinuity-Cap (D-Cap) of four notches (moderate risk) is not driving the rating.
The Stable Outlook on the Pfandbriefe reflects that on SFG’s IDR.
Beneficial IDR Uplift: Fitch has assigned a two-notch IDR uplift to the programme. The IDR
uplift reflects the exemption of Pfandbriefe from bail-in, Fitch’s view of Germany as a covered
bonds intensive jurisdiction and the fact that resolution by other means than liquidation is
considered likely for a German savings bank.
Credit Loss Driving OC: The main component of the 16% ‘AAA’ breakeven OC is the credit
loss of 10.7%. In a ‘AAA’ scenario Fitch has calculated a weighted average (WA) default
probability for the cover assets of 29.9% and a WA recovery rate of 67.7%. This reflects the
programme being mainly exposed to residential mortgages but also comprising 16% share of
small commercial assets. The cash flow valuation component of 9.4% reflects differences in the
weighted average life of assets and liabilities, with 10.8 for the former and 9.4 for the latter.
Four-Notch Cushion: The ‘AAA’ rating of the Pfandbriefe would be vulnerable to a downgrade
if any of the following occurs: Sparkasse Pforzheim Calw is downgraded to ‘BBB-‘ or below; or
the total number of notches represented by the IDR uplift and the D-Cap is cut to one or lower;
or the level of OC taken into account by Fitch falls below the breakeven OC of 16.0%.
Programme Highlights
Mixed Portfolio, Predominantly Residential: The covered bonds are secured by a dynamic
pool of 78% residential mortgages and roughly 16% of commercial mortgage assets, with the
remainder consisting of substitute assets in the form of debt issued by German federal states.
The residential pool is granular with an average loan size of 57,900 euros and exhibits a
comparatively low risk profile. The commercial part is more concentrated in terms of borrower
size with the largest ten obligors making up 24.7%.
Related Research
Covered Bonds Surveillance Snapshot
(July 2015)
'B' Portfolio Loss Rates for Covered Bonds
(September 2015)
The Credit Outlook (July 2015)
Analysts
Jan Seemann, CFA
+49 69 768076 112
[email protected]
Dr. Georgy Kharlamov
+49 69 768076 263
[email protected]
www.fitchratings.com
However, with an average loan size per borrower of 591,225 euros the commercial part
consists of smaller loans compared to other commercial real estate Pfandbrief programmes
rated by Fitch.
High Regional Concentration: Sparkasse Pforzheim Calw`s operations are almost
exclusively concentrated in the region of Pforzheim Calw in the south-western German federal
state of Baden-Wuerttemberg, as each individual savings bank focuses on providing standard
banking products within a clearly defined local area. The region is relatively affluent and is
shaped by a large number of small and medium sized companies with a focus on engineering.
To account for this regional concentration, Fitch ran a sensitivity analysis with increased default
and recovery assumptions to reflect the risk that an unexpected economic shock in the region
would negatively affect the performance of the whole portfolio.
25 September 2015
Covered Bonds
Sovereign Impact
The covered bond rating does not include any adjustments due to Germany’s sovereign rating
of ‘AAA’/Stable. For countries rated above ‘A+’ Fitch applies its standard liquidity gap analysis,
which forms part of the D-Cap, focussing on asset liquidity following an idiosyncratic stress of
an issuer, while the banking sector as a whole is expected to remain stable and not suffer from
a systemic crisis. Therefore, Fitch’s view on liquidity and systemic risk is unlikely to change
unless the German sovereign was downgraded four notches to ‘A+’ or below.
Germany has a country ceiling of ‘AAA’ and all cover assets are located in Germany.
Therefore, Fitch does not adjust the calculated rating default and recovery rates, which are
applied in its covered bond analysis.
Sensitivity Analysis
There is limited downward pressure on the ‘AAA’ rating for Sparkasse Pforzheim Calw’s
mortgage covered bonds. Sparkasse Pforzheim Calw’s Long-Term IDR of ‘A+’ has a Stable
Outlook and the IDR is driven by the mutual support of the SFG member banks. With the
current IDR uplift of 2 and D-Cap of 4 in place, Sparkasse Pforzheim Calw’s covered bond
rating would likely remain unchanged (due to IDR impact) unless the IDR fell by five notches to
‘BBB-’.
Figure 1
Pforzheim Calw
If Sparkasse Pforzheim Calw’s IDR remains at ‘A+’, the covered bond rating would likely
remain unchanged (due to IDR uplift and D-Cap impact) unless the combination of the IDR
uplift of 2 and D-Cap of 4 (equivalent to a total of 6 notches currently) fell to one notch. This
would involve the D-Cap moving to 0 or 1, which would correspond to a full discontinuity or very
high discontinuity risk. These are unlikely assessments for liquidity protection in the form 180days liquidity coverage for a standard mortgage cover pool in a country with a sovereign rating
of ‘AAA’.
There is a large cushion between the breakeven OC of 16% and the level of OC Fitch gives
credit to in its analysis, which equals 100%. This is the lowest nominal OC observed in the last
12 months.
The Issuer
Sparkasse Pforzheim was founded in 1834 and merged in 2003 with Kreissparkasse Calw.
th
Today, Sparkasse Pforzheim Calw is the 11 largest savings bank in Germany and is active in
the residential and commercial loan market. The bank offers all necessary services to private
and commercial clients.
Source: Fitch
Related Criteria
Covered Bonds Rating Criteria (July 2015)
Counterparty Criteria for Structured Finance
and Covered Bonds (May 2014)
Criteria for Interest Rate Stresses in
Structured Finance Transactions and
Covered Bonds (Dec 2014)
EMEA RMBS Master Rating Criteria
(Aug 2015)
Criteria Addendum: Germany – Residential
Mortgage Assumptions (Aug 2015)
Criteria for the Analysis of Commercial Real
Estate Loans Securing Covered Bonds
(May 2015)
Covered Bonds Rating Criteria – Mortgage
Liquidity and Refinancing Stress Addendum
(Sep 2015)
Fitch's Mortgage Covered Bond Refinancing
Stresses – Excel File (Sep 2015)
Sparkasse Pforzheim Calw
September 2015
The region of Pforzheim Calw is located in the southern German state (Bundesland) of BadenWuerttemberg. It lies closely to the cities of Stuttgart and Karlsruhe. The region is relatively
affluent and is shaped by a large number of small and medium sized companies with a focus
on engineering and electronics. Furthermore, a cluster of mail-order businesses can be
observed. For historic reasons numerous jewellers and watch-makers are located in the area,
too.
Sparkasse Pforzheim Calw`s IDR has been assigned in line with the SFG`s IDR. SFG includes
413 savings banks, 361 of which Fitch has assigned a group rating. The savings banks form a
homogenous and relatively cohesive group and are organised into 12 regional savings banks
associations. At the national level, Deutscher Sparkassen- und Giroverband (DSGV), the
association of regional savings bank associations, represents the savings banks and the
broader SFG including the Landesbanken. Each individual savings bank focuses on providing
standard banking products within a clearly defined local area.
The covered bond holders benefit from a dual recourse against the cover pool, secured by
cover assets originated by Sparkasse Pforzheim Calw, and an unsecured, unsubordinated
recourse against the issuer (see Appendix 1 for a programme summary).
2
Covered Bonds
Abbreviations
D-Cap: Discontinuity Cap
IDR: Issuer Default Rating
OC: Overcollateralisation
PD: Probability of Default
WAL: Weighted Average Life
WAFF: Weighted Average Frequency
of Foreclosure
WARR: Weighted Average Recovery
Rate
IDR Uplift of 2 Notches
In bank resolution frameworks where covered bonds are favourably treated, such as under the
Bank Recovery and Resolution Directive (BRRD) for EU countries, Fitch’s analysis starts with
an uplift over the IDR of up to two notches for programmes of issuers rated in the ‘BB’ category
and above. A two-notch uplift is granted if at least two of the following three factors are present
in Fitch’s view or one notch if one of the factors is present.
Figure 2
IDR Uplift of 2 for Sparkasse Pforzheim Calw’s Covered Bonds
IDR uplift driver
Relative ease/motivation
for alternative resolution
methods to liquidation
Covered bond intensive
country
Sufficient protection
through senior unsecured
debt
Fitch assessment
Yes. The bank is part of SFG, which is regarded as a systemically important,
mutual support group. The whole group is therefore treated as a single issuer
for the purpose of this analysis.
Yes. Germany is considered a covered bond intensive jurisdiction.
No. Sparkasse Pforzheim Calw relies to a greater extent on deposits than
senior unsecured for funding. As a consequence, capital available for bail-in is
limited.
Source: Fitch
D-Cap of 4 Notches
The potential risk that a covered bond could default if recourse shifts to the cover pool from an
issuer is captured via Fitch’s D-Caps, which determine the maximum uplift from the IDR
(adjusted by any IDR uplift) to the tested rating on a PD basis. It reflects the highest risk
assessment of the five components ranging from ‘8’ for minimal discontinuity to ‘0’ for full
discontinuity.
Fitch has assigned this programme a D-Cap of 4 notches (moderate risk). Liquidity gap and
systemic risk is assessed as moderate and constitutes the weakest link in the analysis.
Figure 3
Summary of Sparkasse Pforzheim Calw’s Covered Bonds Discontinuity
Risk Assessment
Overall assessment
Asset segregation
Liquidity gap and systemic risk
Systemic alternative management
Cover pool-specific alternative management
Privileged derivatives
4 (moderate risk)
Low risk
Moderate risk
Very low risk
Low risk
Very low risk
Source: Fitch
Details on the assessment for each D-Cap component can be found in Appendix 2.
Cover Pool
As of 4 September 2015, the cover pool contained EUR843.7m of residential mortgage loans to
private individuals and EUR177.9m of loans to small and medium companies for financing
commercial properties.
Sparkasse Pforzheim Calw
September 2015
3
Covered Bonds
Key information about the residential and commercial pools is given in the tables below.
Figure 4
Residential Pool
Characteristics as of 04 Sep 15 based on loan-by-loan data
General
Current principal balance (EURm)
Number of loans
Number of borrowers
Average current loan per borrower (EUR)
WA seasoning (years)
WA remaining term to maturity (years)
843.7
13,606
10,295
81,953
5
20
Amortisation type (%)
Annuity
Bullet
Other
86.6
13.3
0.1
Interest type (%)
Fixed
Floating
97.7
2.3
Employment status (%)
Employee
Self employed
Civil servant
Retiree
79.6
11.8
4.2
4.4
Property type (%)
Flat
Single family house
Multifamily house
Other
22
66.9
7.6
3.5
Property purpose (%)
Owner occupied
Investment property
86.5
13.5
Source: Fitch
Figure 5
Commercial Pool
Characteristics as of 04 Sep 15 based on loan-by-loan data
General
Current principal balance (EURm)
Number of loans
Number of borrowers
Average current loan per borrower (EUR)
WA remaining term to maturity (years)
Amortisation type (%)
Amortising
Bullet
177.9
471
301
591,225
14
94.6
5.4
Source: Fitch
Cover Pool Credit Analysis
The credit analysis of the residential portfolio was based on loan-by-loan data as of 4
September 2015 and conducted in line with Fitch’s EMEA RMBS Rating Criteria, published on
28 August 2015 and Criteria Addendum: Germany, published on 20 August 2015.
Fitch used its asset model (ResiEMEA) to calculate the estimated gross loss for each loan in
the portfolio as the product of its foreclosure frequency and loss severity. The gross loss is a
measure of the expected loss on each loan for the associated rating level (each corresponding
to a particular stress scenario). The weighted average foreclosure frequency and weighted
average recovery rate are the key outputs from the asset analysis that are used when Fitch
models the cash flows of a transaction.
Sparkasse Pforzheim Calw
September 2015
4
Covered Bonds
The main factors driving Fitch’s base foreclosure frequency are the original loan-to-value
(OLTV) and the debt-to-income (DTI) ratio. Fitch calculated an average OLTV of 75.2%. The
DTI ratio is not provided by any German covered bond issuer on residential mortgage loans.
Fitch applied its standard assumption of 40% that is generally used in the absence of loan-byloan information.
Fitch’s recovery assumption is mainly driven by the value of the property at the time of the
analysis and rating scenario dependent market value declines (MVDs), comprising a house
price decline assumption and a quick sale adjustment. Both are a function of regional groups
(which are classified by economic strength – groups A, B, C and D) and property type. The
market values in the portfolio data are indexed by taking into consideration the respective
valuation date. The ‘AAA’ MVD for each property results in a weighted average portfolio MVD
of 60%.
With regards to risk characteristics, the residential portfolio benefits from factors that, in Fitch’s
view, show a lower risk profile in terms of foreclosure frequency. For example, as can be seen
from the table above, the majority of the loans are amortising annuities with a fixed interest
rate, the majority of the borrowers are employees and the majority of properties are owner
occupied.
However, the residential pool has a very high geographic concentration, with roughly 97% of
the properties/borrowers located in Baden-Wuerttemberg, the state where Sparkasse
Pforzheim Calw operates. While this is an economically strong state, an unexpected shock in
the region would severely affect the performance of the whole portfolio. The agency took this
into account in its analysis by running a sensitivity test with increased foreclosure frequency
and loss severity assumptions.
A substantially smaller portion of the pool consists of loans to small and medium companies for
the financing of commercial properties. This portion is more concentrated in terms of borrower
size than the residential part. In line with its criteria, Fitch analysed this portion of the pool using
its Portfolio Credit Model (PCM). The rating default rates produced by PCM are driven primarily
by the portfolio concentration, as well as the long term to maturity. The rating recovery rates
are driven by the collateral value, adjusted by applying certain rating specific haircuts in line
with Fitch’s Criteria for Rating Granular Corporate Balance-Sheet Securitisations (SME CLOs),
published on 6 March 2015.
The weighted average asset analysis results for the residential and commercial pools can be
found in the figure below.
Figure 6
Weighted Average Asset Model Output for Residential and Commercial
Pools
(%)
Rating default rate
Rating recovery rate
Rating loss rate
AAA
29.9
67.7
9.7
AA
25.4
75.4
6.3
A
20.0
80.7
3.9
BBB
15.0
86.0
2.1
BB
10.2
93.2
0.7
B
6.6
97.4
0.2
Source: Fitch
Cash Flow Analysis
Fitch’s cash flow model simulates the asset cash flows to reflect prepayment, servicing costs,
delinquencies, defaults and recoveries in multiple stress scenarios under various issuer default
timings.
The programme is rated on a recovery basis, so contrary to the modelling of cash flows for
timely payment, Fitch applies one-half of the normal refinancing spreads to calculate the
stressed NPV of the entire cover pool rather than solely the portion of assets sufficient to bridge
Sparkasse Pforzheim Calw
September 2015
5
Covered Bonds
maturity mismatches. The applied refinancing spread in a ‘AAA’ are 100bp compared to 200bp.
No price cap applies when computing the stressed NPV of assets.
The breakeven OC level calculated by Fitch is highly sensitive to prepayment assumptions.
Fitch tested prepayments from 0% up to 10%. High prepayments shorten the assets’ weighted
average life (WAL) to 5.3y from 10.8y, increasing maturity mismatches as this compares to a
WAL of the covered bonds of 9.4y. Modelling low interest rates with prepayments results in the
most severe outcome because of the resulting negative carry of prepaying fixed mortgage
contracts into a floating cash portion reinvested at a stressed interest rate.
Defaulted loans are assumed to recover with a certain time lag. Based on data provided by
Sparkasse Pforzheim Calw, we assume a recovery lag of 2.6y in the ‘AAA’ scenario. Fitch did
not apply any FX stresses as both the cover assets and the covered bonds are denominated in
EUR.
Figure 7
Amortisation Profile (Unstressed)
(As of September 2015)
(EURbn)
Cover assets
Pfandbriefe
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1
12
23
34
45
56
67
78
89
100
111
122
133
144
155
166
(Quarters)
Source: Fitch/Sparkasse Pforzheim Calw
Breakeven OC for the Rating
Figure 8
Breakeven OC Components
30%
Asset Disposal Loss
Cash Flow Valuation
Credit Loss
Breakeven OC (Recovery only)
based)
20%
10%
0%
Sparkasse Pforzheim Calw
Source: Fitch
Fitch has calculated a breakeven OC of 16.0% for the assigned rating. The main driver is the
credit loss component of 10.7%. Compared to purely residential programmes this is relatively
high and is the result of Sparkasse Pforzheim Calw’s 16% share of commercial assets in the
cover pool.
To a lesser extent, breakeven OC is explained by the cash flow valuation component of 9.4%
which reflects differences in the weighted average life of assets and liabilities, with 10.8 years
for the former and 9.4 years for the latter. As the programme is rated on a recovery basis, Fitch
does not model for timely payment. The asset disposal loss component of 7.3% therefore
displays a stressed valuation of the full cover pool at half of the refinancing spread applied
when tested for timely payments.
In future, breakeven OC levels will be affected by, among others factors, the profile of the cover
assets relative to outstanding covered bonds, which can change over time, even in the
absence of new issuances. Therefore, it cannot be assumed that a given level of OC
supporting the assigned rating will remain stable.
On-Going Programme Review
The agency will periodically review the credit quality of the cover pool and perform a cash flow
analysis to assess whether the current OC provides protection against identified risks
commensurate with the rating of the Pfandbriefe issued by Sparkasse Pforzheim Calw under
this programme.
Cover pool and covered bonds information will be updated regularly and displayed on Fitch’s
covered bond surveillance tool (available at www.fitchratings.com) and in the quarterly Covered
Bonds Surveillance Snapshot (July 2015).
Sparkasse Pforzheim Calw
September 2015
6
Covered Bonds
Appendix 1: Programme Summary
Under this programme, Sparkasse Pforzheim Calw can issue covered bonds which are
governed by the German Pfandbrief Act. The covered bonds are secured by a dynamic pool of
predominantly residential mortgages and roughly 16% of granular commercial mortgage assets
located in Germany. The cover assets, originated by Sparkasse Pforzheim Calw, remain on the
issuer`s balance sheet and are serviced by the issuer. They are recorded in the cover register.
The covered bonds rank pari passu among themselves and represent direct, unsecured and
unconditional obligations of Sparkasse Pforzheim Calw. The issuer is regulated by the
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) which is also responsible to appoint
the Treuhänder (trustee). Without the Treuhänder’s consent the bank is neither allowed to put
assets in the cover register nor to remove them.
At or even before insolvency, a special cover pool administrator (Sachwalter) would be
appointed by the court at the request of BaFin to take over the management of the cover pool.
The assets recorded in the cover register would not be part of the issuer’s insolvency estate
and would be unaffected by the opening of insolvency proceedings. This estate would continue
to exist as a Pfandbriefbank with limited business (PBwLBA), carrying a banking license, and
would have the limited purpose of managing the cover assets in favour of Pfandbrief holders
and counterparties to repay the Pfandbriefe in full and on time. To serve this purpose the
alternative manager has the right to sell assets, to receive the cash flows from the assets, to
take out loans or to issue new Pfandbriefe.
Figure 9
Simplified Group Structure Diagram
Diagram of A Pfandbrief Issuance
Federal Financial
Supervisory Authority BaFin
Regular Monitoring
Legal Framework: Pfandbrief Act
Cover Pool Monitor
and Deputy-App. By
BaFin
Cover Pool
Administrator-App. By
BaFin in Case of
Issuer Involvency
Sparkasse Pforzheim Calw
Any Bank with a License from BaFin
Cover Pool and
Registered
Derivatives
Pfandbriefe
Issuance
Proceeds
Swap
Agreements
Pfandbrief
Investors
Derivative
Counterparties
Senior Unsecured
Liabilities
Other Assets
Subordinated
Liabilities
Cash and
Securities
Shareholder’s
Funds
Source: Fitch
Sparkasse Pforzheim Calw
September 2015
7
Covered Bonds
Appendix 2: D-Cap Assessment for Sparkasse Pforzheim Calw’s
Covered Bonds
Asset Segregation: Low Risk
Fitch expects that ring-fencing of the cover pool will be effective when applying any D-Cap
assessment other than full discontinuity, given the ‘all or nothing’ nature of this risk. The
differentiation between the D-Cap categories is based on whether any portion of the cash flows
or assets might still be lost (and if so, to what extent), which would lower the cover pool amount
available for bondholders.
A ‘low’ risk assessment is applied to German Pfandbrief programmes, given the strong
legislative framework in place but also taking into account the remote risk of a retransfer of OC
available above the legally required minimum. The agency considers it very unlikely that any
claims would reduce the cover pool available to investors after issuer default, as the German
Pfandbrief Act explicitly states that upon issuer insolvency the cover assets recorded in the
cover register are separated from the general insolvency estate of the issuer (insolvency
remote) and constitute a special estate, a Pfandbriefbank with limited business activity holding
a banking license. The cover pool is exclusively available to the Pfandbrief investors and
registered derivative counterparties.
However, under existing Pfandbrief legislation, uncertainty remains regarding voluntarily held
OC. That is, such OC could be withdrawn from the cover pool before initiation of an insolvency
procedure. But the agency expects that in practice, before releasing cover assets, the
Treuhänder would consult BaFin and would also take into account the levels of OC the
Pfandbrief programme was managed to before immediate problems of the issuing bank. In
addition the Pfandbrief Act states that the insolvency administrator of the Pfandbriefbank is
entitled to retransfer cover assets, in excess of the amount that will be needed to repay the
Pfandbriefe, back to the general insolvency estate. But due to the long-term nature of the
assets and potential future market volatility likely to be taken into account Fitch regards it as
difficult to prove that OC is obviously not needed.
German issuers operate under an integrated template and no external account bank for
collections is in place. Normally, commingling is of higher risk for integrated templates.
However, strong legislation justifies a low risk assessment. In accordance with Fitch`s
counterparty criteria, a potential loss resulting from cash flows being commingled with the
general bank account may be reflected for lower rated entities.
The covered bonds are secured on a dynamic pool of assets that remain on the issuer’s
balance sheet but are recorded in a dedicated cover register. The legal effect of cover asset
registration is to segregate the assets so that the Pfandbrief holders have special creditor
privilege in the event of the issuer’s winding up or dissolution. At issuer insolvency, the
segregated pool will be separated from the general insolvency estate and managed
autonomously by a specific, dedicated administrator for the benefit of the respective Pfandbrief
holders.
Sparkasse Pforzheim Calw
September 2015
8
Covered Bonds
Figure 10
Asset Segregation: Low Risk
Component driver
Segregation of cover pool
from other creditors of issuer
Excess OC immune from
claims from other creditors
Asset and liability claw back
risk
Commingling risk
Set-off risk for deposits
Fitch assessment
Cover assets are segregated through their registration in the cover register
(Deckungsregister). Registered assets form a special estate (PBwLBA)
and are exclusively available for the claims of the bondholders and
priviledged derivative counterparties.
Residual risk remains as the German Covered Bond law states that assets
should be given back to the general insolvency estate if they are “obviously
not necessary” to cover the claims of the bondholders, the minimum OC
and the costs of the Pfandbrief Bank with limited business activity
(PBwLBA).
Remote risk of asset and liability claw back as circumstances in which claw
back may occur are rare and rather hypothetical.
Residual risk remains as prior to the commencement of insolvency
proceedings or appointment of a Sachwalter collections received are not
separated from the general bank account in the issuer`s name. No
structural mitigating factors are in place. After beginning of insolvency
proceedings or appointment of a Sachwalter commingling is legally
prohibited.
Set off against assets entered into the pool is excluded by law.
Netting is only allowed for derivative contracts belonging to the same pool
and from the same counterparty. Currently no privileged derivatives are
registered to the cover pool of Sparkasse Pforzheim Calw.
Source: Fitch
Liquidity Gap and Systemic Risk: Moderate Risk
Fitch has classified the liquidity gaps and systemic risk component as ‘moderate’, driven by the
180-day liquidity provision regulated in the German Pfandbrief Act, the assumed liquidity of
German residential mortgage assets, the amount and frequency of asset sales in certain stress
scenarios, and the expected access of the PBwLBA to the Eurosystem via national central
bank funding for short-term liquidity.
As with most covered bond programmes, the incoming cash flows from cover assets do not
exactly match at all times the cash outflows on the liabilities. Liquidity shortages could arise,
especially shortly after the issuer default.
The main liquidity mechanism provided by the Pfandbrief law to cover such liquidity gaps is the
180-day liquidity rule. This requires that the maximum cumulative liquidity gap over the next
180 days, calculated on a daily basis, is covered by liquid or European Central Bank-eligible
assets. However, expected cash flows are not adjusted for expected defaults, prepayments
and costs related to the management of the cover pool and the mechanism may not fully cover
the six months liquidation timing assumed for German residential mortgage assets. But as Fitch
gives credit to the ability of a PBwLBA to repo its own covered bonds or eligible assets within
the Eurosystem the liquidity gap and risk assessment is ‘moderate’ and in line with most
mortgage programmes in countries with established mortgage markets.
The Sachwalter has the ability to choose which assets should be liquidated in order to raise
liquidity. The share of less liquid commercial assets is not driving this analysis as the share of
residential assets is sufficient to cover any modelled shortfall.
Sparkasse Pforzheim Calw
September 2015
9
Covered Bonds
Figure 11
Liquidity Gap and Systemic Risk: Moderate Risk
Component driver
Principal protection
Access to repo
transactions
Liquidity protection
Swap termination
payments
Systemic risks
Fitch assessment
Not fully sufficient. 180 days mandatory liquidity provision covering the
maximum liquidity gap of the next six months. The bonds are issued as hard
bullet.
Fitch expects a 6-12 month liquidity timing for German mortgages.
The agency gives additional credit to the ability of a PBwLBA to repo its own
covered bonds or eligible assets within the Eurosystem, provided the issuer
has proven it has appropriate systems in place by already accessing the
national central bank facilities
Sufficient. Liquidity protection covers more than three month’s interest due
and one quarter of annual senior expenses. Liquid assets are registered into
the cover pool and as a consequence fully segregated.
Swap termination payments rank pari passu with the bondholders, but no
privileged derivatives are registered for Sparkasse Pforzheim Calw.
No additional stress applied. As Germany (AAA/stable outlook) is rated above
A+, Fitch focusses on asset liquidity following an idiosyncratic stress of an
issuer while the banking sector as a whole is expected to be stable
Source: Fitch
Alternative Management
Systemic Alternative Management: Very Low Risk
Fitch takes into consideration the framework or contractual clauses governing the appointment
of a substitute manager — together with the length of time required to appoint one — any
potential conflict of interest (in cases where a single administrator in a bankruptcy takes care of
covered bonds and other creditors), the manager’s responsibilities in the servicing and
liquidation of the cover assets to meet payments due on the covered bonds and any further
protection due to oversight or potential support for regulated covered bonds.
Fitch has assessed the level of risk under systemic alternative management as ‘very low’, in
line with all German Pfandbriefe programmes. This assessment is mainly driven by the detailed
duties and powers of the Sachwalter stipulated in the German Pfandbrief Act and the comfort
provided by the active oversight of BaFin under the Pfandbrief framework. The assessment
also reflects the positive effect of the active oversight undertaken by BaFin.
Figure 12
Systemic Alternative Management: Very Low Risk
Component driver
Administrator takes exclusive care of covered
bondholders? When are they appointed?
Importance of timeliness of payments in the legal
provisions
Substitute manager able to sell cover assets or
borrow to make timely payments
Conflicts of interest in alternative management
Fitch assessment
A special administrator (Sachwalter) will service the
pool in the interest of the bondholders.
The special administrator will be appointed at the
latest at insolvency of the issuer by BaFin. Prior
appointment is possible.
Pfandbrief Act highlights that liabilities should be
repaid on their due date.
The special administrator has the power to sell assets
and take bridge-financing, take out loans or issue new
Pfandbriefe.
The special administrator is solely responsible for
administration of the covered bond programme after
the issuer’s insolvency.
Source: Fitch
Cover Pool-Specific Alternative Management: Low Risk
Fitch focuses on the likely ease of the transferability of relevant data and IT systems to an
alternative manager and buyer, with such quality and ease also judged on the quality and
quantity of data provided. Fitch has assessed the level of risk under cover pool alternative
management as ‘low’, reflecting the cover assets’ type and the quality of Sparkasse Pforzheim
Calw’s systems and processes in place.
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Covered Bonds
In practice, a smooth transition to an alternative manager is dependent on the quality of the
issuer’s systems. Fitch believes that a transition to an alternative manager for Sparkasse
Pforzheim Calw’s cover pool would be facilitated by the established and standard IT system it
uses for its cover pool management. The agency believes that standard software could reduce
the complexity of the reporting and monitoring procedure and would positively affect the
efficiency of the workflow.
Sparkasse Pforzheim Calw uses standard software provided by an external servicer for its
cover pool management. The reporting is generally automated. Data is delivered on a loan-byloan basis in Fitch’s template.
Figure 13
Cover Pool Alternative Management: Low Risk
Component drivers
Cover assets, debtors’ accounts and
privileged swaps clearly identified
within IT systems
Standardised or custom-made IT
systems used.
Fitch assessment
Market standard systems are in place that ensure identification of
that registered assets of Sparkasse Pforzheim Calw.
Fitch considers used systems to be well known in the market,
enabling an alternative manager to easily start managing the
programme.
Automation and speed of cover pool All Fitch templates will be provided at least on a quarterly basis and
reporting
produced fully automated. Only minor data limitations exist.
Adequate filing of loan
Loan files for residential and commercial loans are available partially
documentation, evidence of security in electronic and paper based form.
Source: Fitch
Privileged Derivatives: Very Low Risk
Fitch considers programmes encompassing privileged hedging agreements to be more
vulnerable to a potential insolvency of the issuer. As no privileged derivatives are registered to
the mortgage covered bonds of Sparkasse Pforzheim Calw, a very low risk assessment
applies.
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September 2015
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Appendix 3: Originator and Servicer Operational Review
Origination
For historical reasons, Sparkasse Pforzheim Calw is organised in three market divisions
(Pforzheim, Enzkreis, Calw). Each division is split into 29 regional centres, with 120 branches
and service centres. For the region of Pforzheim there are seven branches (“Filialdirektionen”).
These branches are responsible for loan origination. If a small service centre lacks the size for
loan origination (usually 30-60 loans need to be originated annually) this will be done by one of
the larger branches.
Loan origination for business clients follows a credit assessment performed by credit
specialists. Loan origination for retail clients is organised by competences.
Underwriting
Underwriting processes are centralised and are supported by standardised and consistent
processes, IT-systems and risk management. All borrowers are subject to a credit scoring
process. No loan is approved based on the collateral only. A preliminary credit scoring on the
basis of historical information with the bank (if the client has been a customer before, e.g. on a
credit card) is performed. If no prior client relationship exists, statements for the most recent
three months are necessary. In case a contract is created a current credit scoring (Schufa) is
performed. A number of internally developed scorecards and check-lists are used to ensure a
complete and consistent approach.
The appraisal process for each property is based on an on-site visit. For small financings the
evaluation is done on the basis of photographs. Should the construction of a new building be
delayed, an on-site visit at the construction site will take place. However, such a case would not
be added to the cover pool. Appraisers are trained continuously, at least annually.
Servicing
The covered bond programme is managed with a market standard software, allowing for a daily
registration of newly added loans. However, loans are actually added in a weekly process by
the Treuhänder. The Treuhänder performs regular sample checks on the paper-based loan
files. If input errors are detected, these are corrected within one week and the loans will be
registered afterwards.
Ten days after a payment has been missed, a letter is sent to the borrower. This is repeated in
ten-day intervals. For loans above 50.000 euro a close down concept is being established. In
case loans are in arrears for more than 60 days, an evaluation takes place if payments are
likely within the next 30 days. Should this not be the case, loans are excluded from the cover
pool. The aim of the issuer is to never have loans with 90+ days in arrears in the cover pool.
The customer scoring has 18 classes, whereby everything higher than class 15 is considered
defaulted. Loans in arrears for 90+ days go to class 16. When the contract is terminated the
loans are classified as class 18 and after a write down of the loan (“Einzelwertberichtigung”) it
is classified as class 17. For commercial real estate customers from classes 11 to 13 the bank
performs special servicing. Once the loan moves to class 14 or lower it is internally considered
to be a bad loan.
For any loan worsening by three categories or more in a given year, the bank will perform a
more detailed oversight (e.g. reducing overdraft).
Sparkasse Pforzheim Calw
September 2015
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Covered Bonds
Appendix 4: Outstanding Liabilities
Figure 14
List of Outstanding Public Covered Bonds
ISIN
DE000A1CSEP4
DE000A1KQ5U9
DE000A1K0GJ9
DE000A1MA5B5
DE000A1PGT98
DE000A1R08F4
DE000A1R1CB6
DE000A1TNKM3
DE000A1TNKN1
DE000A11P705
DE000A11QCA4
Currency
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
Size (m)
50
10
10
10
10
20
10
10
25
10
10
Interest type
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Coupon rate (%)
3.250
3.125
3.375
2.800
2.000
2.125
1.125
1.625
2.125
2.000
1.750
Maturity
30 Nov 16
03 May 16
04 Aug 21
15 Nov 21
01 Jun 22
08 Feb 23
30 Apr 20
07 Aug 20
07 Aug 23
05 Feb 24
11 Feb 22
Source: Sparkasse Pforzheim Calw
Sparkasse Pforzheim Calw
September 2015
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Appendix 5: Legal Framework
Figure 15
Main Characteristics of German Legislative Pfandbriefe
German Pfandbrief Act (January 2015)
Issuers
Supervision
Financial institutions with license to issue Pfandbriefe
German Federal Financial Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht, BaFin)
Mortgage collateral  Residential or commercial mortgages
 Geographical scope to EU / EEA, Switzerland, USA, Canada, Japan, Australia,
New Zealand or Singapore
 Up to 20% of the outstanding Pfandbriefe can be substitute assets
Loan‐to‐value limits 60% LTV based on the mortgage lending value.
for mortgage loans
Public sector assets  Public Sector Assets
 Geographical scope to EU / EEA
 For assets from USA, Canada, Japan and Switzerland, the debtor must be
assigned to credit quality step 1
 Up to 10% of the outstanding Pfandbriefe can be substitute assets
Transfer of assets Integrated template, assets remain on issuer`s balance sheet
Cover register
Cover register is required for the respective cover pool
Cover pool monitor Independent trustee appointed by BaFin
Cover pool
A dedicated cover pool administrator (Sachwalter) would take over the
administrator
management of the cover assets and outstanding liabilities post issuer default. He
would be appointed by a court at the request of BaFin, at the latest upon the
issuer’s insolvency
Minimum OC
 0% nominal value
 2% stressed net preset value (NPV). The NPV is detailed in a specific net
present value regulation (Barwertverordnung) including procedures, stress
scenarios and risk models. The approach can be static or dynamic, or based on
internal models.
Treatment of swap Derivative counterparties rank pari-passu with the claims of the covered
counterparties
bond holders
PBwLBA
Pfandbriefbank with limited business activity (Pfandbriefbank mit beschränkter
Geschäftstätigkeit).
The cover pool constitutes an insolvency-free asset and continues to exist post
issuer default as a PBwLBA to ensure the timely payment of the liability obligations.
The PBwLBA would be managed by the cover pool administrator
Source: Fitch
Sparkasse Pforzheim Calw
September 2015
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Covered Bonds
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