Enhanced clarity on insolvency ranking of Austrian unsecured debt prompts upgrade of the covered bond ratings. Strong credit quality of the cover pools coupled with ongoing high levels of overcollateralisation supports rating uplift.
Scope Ratings has today upgraded to AAA from AA+ the Austrian mortgage covered bonds (Hypothekenpfandbriefe) issued by Hypo Bank Burgenland AG (Bank Burgenland) and Bausparkasse Wüstenrot AG (Wüstenrot). The Outlook for both covered bonds remains Stable.
Scope’s upgrade to AAA/Stable of the Hypothekenpfandbriefe issued by Bank Burgenland and Wüstenrot is primarily driven by the one notch upgrade of the banks’ issuer ratings. (both bank ratings are private). The improved bank ratings translate into a one-notch higher starting point for the determination of covered bond ratings. Rating actions on the issuers follow the recently adopted amendment to Section 131 of the Austrian Bank Recovery and Resolution Act (BASAG) which leads Scope to fully apply its bank rating methodology when rating Austrian banks.
Both covered bond programmes’ credit characteristics, in combination with the available overcollateralisation, fully support the higher ratings. Scope’s covered bond ratings reflect a seven-notch rating uplift, , which incorporates an unchanged view on the fundamental support factors (+4 notches) for both programmes, anchoring the rating floor at AA-. The additional cover pool uplift of three notches on top of the fundamental uplift allow the programmes’ to achieve AAA ratings.
The higher rating floor for the covered bond ratings reflects the ability of the Austrian banks to issue contractually defined senior debt replicating the characteristics of non-preferred senior debt issued elsewhere in the European Union. In a liquidation scenario (or, by extension, a resolution scenario) such debt would rank below covered bonds, senior unsecured liabilities such as deposits and outstanding senior unsecured debt, but above subordinated debt and/or capital securities. Scope’s bank rating methodology specifies that when there is sufficient clarity regarding the positioning of MREL debt in an EU bank’s capital structure, the agency’s rating will be at least one notch below the respective bank’s issuer rating or the rating of its preferred senior debt. Based on the amended legislation referenced above, Scope will rate currently outstanding senior unsecured debt of Austrian banks at the same level as the issuer rating, while future MREL-eligible senior non-preferred debt will be rated at least one notch below.
Scope has introduced the notching via a one-off uplift of the respective banks’ ratings. This approach reflects the agency’s opinion that while the credit fundamentals of the groups have not changed, their bank rating (which is the starting point for the covered bond rating) can now benefit from the protection of a materially more ample capital structure in a default-like situation going forward.
Sound and broadly unchanged risk profiles of the covered bond programmes continue to support the maximum three-notch cover pool uplift, now supporting AAA covered bond ratings.
Credit quality of Bank Burgenland’s cover pool stable, removal of forex risk lowers supporting overcollateralisation
At 31 March 2018, Bank Burgenland’s covered bonds benefitted from an overcollateralisation of 280% based on the eligible cover assets and 321.1% on a whole loan basis. Since Scope’s rating of the bonds, the credit quality of the cover pool has improved slightly, reflecting a reduced share of commercial properties (down to around 63% from 68% as of end-July 2017). The cover pool is concentrated in the wider Vienna region and only contains performing loans.
From a cash flow risk perspective, the cover pool remains primarily exposed to mismatch risk. It exhibits a negative weighted average maturity gap of approx. 6.3 years, up from a negative gap of 5.1 years as of last year’s review. The cover assets have a low weighted average maturity of 5.1 years (down from 5.9 years) whereas the outstanding covered bonds exceed the life of the assets with a weighted average maturity of 11.4 years (up from 11 years). This exposes the programme to negative carry.
Interest rate mismatches are high but remained relatively stable with cover assets mostly floating (88% up from 87%) and maturing before the covered bonds, of which 89% (up from 87%) are issued with fixed interest rates and therefore are exposed to interest rate risk.
The covered bond programme is most sensitive to a decreasing and lower-for-longer interest rate environment. There is no remaining forex risk as Swiss franc-denominated mortgage loans, still present at 31 March 2018, have been fully removed from the cover pool by 30 June 2018. According to Scope’s cover pool analysis, an overcollateralisation of 35% on a whole loan basis is able to fully mitigates identified credit and market risks and supports the AAA ratings.
Fundamental credit factors have not changed since the last review, maintaining the four-notch rating uplift and anchoring the additional cover pool-based uplift at AA-.
Credit profile of Wüstenrot’s covered bond programme stable, cover pool increased, long-term issuances raise asset-liability mismatch – ratings remain well supported by available overcollateralisation
At 31 March 2018, Wüstenrot’s cover pool had increased to about EUR 410m (up from EUR 263m as of December 2017) and provides the outstanding mortgage covered bonds with an overcollateralisation of 211% based on the eligible cover assets and 271% on a whole loan basis. The cover pool only comprises Austrian residential mortgage loans granted throughout Austria. Despite the cover pool balance nearly doubling, its characteristics remained relatively stable. Because of the newly added mortgage loans, the average whole loan LTV of 70.3% (up from 68.9%) has increased slightly whereas the weighted average eligible LTV has remained stable at about 53%. The mortgage loans remain granular with a low average loan size of EUR 98,000. The cover pool only comprises performing loans.
From a cash flow risk perspective, the cover pool has become exposed to mismatch risk. The bank has predominantly issued long-term covered bonds resulting in a negative weighted average maturity gap of approx. 1.8 years. The weighted average maturity of the cover assets remained almost unchanged at around 14 years, whereas the weighted average maturity of the EUR 132m in outstanding covered bonds increased to a very long 16.4 years. The long maturities of the bonds expose the programme to negative carry that substantially drives overcollateralisation in a high prepayment scenario. There is limited interest rate risk as around 73% of the loans in the cover pool have a fixed interest rate and most of the floating loans have caps and floors while all covered bonds are currently issued at fixed rates.
The programme remains most sensitive to a decreasing and lower-for-longer interest rate environment. According to Scope’s cover pool analysis, an overcollateralisation of 21% on a whole loan basis is able to fully mitigate identified credit and market risks and supports the AAA ratings.
Fundamental credit factors have not changed since the last review, maintaining the four-notch rating uplift and anchoring the additional cover pool-based uplift at AA-.
Quantitative analysis and key assumptions
Bank Burgenland: Scope analysed the cover pool loan defaults using a normal inverse distribution. Scope assumes stressed lifetime default rates of 10.6% for residential loans and 20% for commercial loans, with coefficients of variation at 60% and 50%, respectively. Scope calculated a weighted average recovery rate of 79% for residential loans and 64.5% for commercial loans in the stressed scenario. The blended servicing fee used in the analysis is 33 bps and the blended refinancing spread 150 bps. In the stressed analysis, Scope used a high prepayment rate (15%) together with non-converting low interest rates that decrease to 1% after the second year.
Wüstenrot: Scope analysed the cover pool loan defaults using a normal inverse distribution. Scope assumes a stressed lifetime default rate of 10.7% with a coefficient of variation at 60%. Scope calculated a weighted average recovery rate of 58.5% in the stressed scenario. The servicing fee used in the cash flow analysis is 20 bps and the refinancing spread 150 bps. In the stressed analysis, Scope used a high prepayment rate (15%) together with non-converting low interest rates that decrease to 1% after the second year.
Scope’s Stable Outlook on both covered bonds reflects: i) the continuous availability of high overcollateralisation which provides a significant buffer against a rise in credit and market risks, thereby maintaining the three notches of cover pool-based support; ii) Scope’s view that European covered bond harmonisation will not negatively impact the fundamental support factors relevant for the issuers and Austrian mortgage covered bonds in general; and iii) Scope’s Stable Outlook on the issuer credit rating of both banks.
The covered bond ratings may be downgraded if: i) the issuer’s credit rating is adjusted by one notch or more; ii) risk in the covered bond programme increases and provided overcollateralisation no longer supports a seven-notch rating uplift; or iii) Scope revises downward the fundamental support factors relevant to the issuers and Austrian mortgage covered bonds in general.
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
Analysis: Carmakers wake up to new pecking order as chip crunch intensifies
By Douglas Busvine and Christoph Steitz
BERLIN (Reuters) – The semiconductor crunch that has battered the auto sector leaves carmakers with a stark choice: pay up, stock up or risk getting stuck on the sidelines as chipmakers focus on more lucrative business elsewhere.
Car manufacturers including Volkswagen, Ford and General Motors have cut output as the chip market was swept clean by makers of consumer electronics such as smartphones – the chip industry’s preferred customers because they buy more advanced, higher-margin chips.
The semiconductor shortage – over $800 worth of silicon is packed into a modern electric vehicle – has exposed the disconnect between an auto industry spoilt by decades of just-in-time deliveries and an electronics industry supply chain it can no longer bend to its will.
“The car sector has been used to the fact that the whole supply chain is centred around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor makers actually do have an alternative.”
Automakers are responding to the shortage by lobbying governments to subsidize the construction of more chip-making capacity.
In Germany, Volkswagen has pointed the finger at suppliers, saying it gave them timely warning last April – when much global car production was idled due to the coronavirus pandemic – that it expected demand to recover strongly in the second half of the year.
That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery.
“Last year we had to furlough staff and bear the cost of carrying idle capacity,” said a source at one European semiconductor maker, who spoke on condition of anonymity.
“If the carmakers are asking us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”
The auto industry spends around $40 billion a year on chips – about a tenth of the global market. By comparison, Apple spends more on chips just to make its iPhones, Mirabaud tech analyst Neil Campling reckons.
Moreover, the chips used in cars tend to be basic products such as micro controllers made under contract at older foundries – hardly the leading-edge production technology in which chipmakers would be willing to invest.
“The suppliers are saying: ‘If we continue to produce this stuff there is nowhere else for it to go. Sony isn’t going to use it for a Playstation 5 or Apple for its next iPhone’,” said Asif Anwar at Strategy Analytics.
Chipmakers were surprised by the panicked reaction of the German car industry, which persuaded Economy Minister Peter Altmaier to write a letter in January to his counterpart in Taiwan to ask its semiconductor makers to supply more chips.
No extra supplies were forthcoming, with one German industry source joking that the Americans stood a better chance of getting more chips from Taiwan because they could at least park an aircraft carrier off the coast – referring to the ability of the United States to project power in Asia.
Closer to home, a source at another European chipmaker expressed disbelief at the poor understanding at one carmaker of how it operates.
“We got a call from one auto maker that was desperate for supply. They said: Why don’t you run a night shift to increase production?” this person said.
“What they didn’t understand is that we have been running a night shift since the beginning.”
NO QUICK FIX
While Infineon, the leading supplier of chips to the global auto industry, and Robert Bosch, the top ‘Tier 1’ parts supplier, both plan to commission new chip plants this year, there is little chance of supply shortages easing soon.
Specialist chipmakers like Infineon outsource some production of automotive chips to contract manufacturers led by Taiwan Semiconductor Manufacturing Co Ltd (TSMC), but the Asian foundries are currently prioritising high-end electronics makers as they come up against capacity constraints.
Over the longer term, the relationship between chip makers and the car industry will become closer as electric vehicles are more widely adopted and features such as assisted and autonomous driving develop, requiring more advanced chips.
But, in the short term, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time it takes to deliver a microcontroller has doubled to 26 weeks and shortages will only bottom out in March.
That puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. European chip industry executives and analysts agree that supply will not catch up with demand until later in the year.
Chip shortages are having a “snowball effect” as auto makers idle some capacity to prioritize building profitable models, said Anwar at Strategy Analytics, who forecasts a drop in car production in Europe and North America of 5%-10% in 2021.
The head of Franco-Italian chipmaker STMicroelectronics, Jean-Marc Chery, forecasts capacity constraints will affect carmakers until mid-year.
“Up to the end of the second quarter, the industry will have to manage at the lean inventory level,” Chery told a recent Goldman Sachs conference.
(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; Additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; Editing by Susan Fenton)
Aussie and sterling hit multi-year highs on recovery bets
By Tommy Wilkes
LONDON (Reuters) – The Australian dollar rose to near a three-year high and the British pound scaled $1.40 for the first time since 2018 on optimism about economic rebounds in the two countries and after the U.S. dollar was knocked by disappointing jobs data.
The U.S. currency had been rising in recent days as a jump in Treasury yields on the back of the so-called reflation trade drew investors. But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.
On Friday it traded down 0.3% against a basket of currencies, with the dollar index at 90.309.
The Aussie rose 0.8% to $0.784, its highest since March 2018. The currency, which is closely linked to commodity prices and the outlook for global growth, has been helped by a recent rally in commodity prices.
The New Zealand dollar also gained, and was not far off a more than two-year high, while the Canadian dollar rose too.
Sterling rose to $1.4009 on Friday, an almost three-year high amid Britain’s aggressive vaccination programme.
Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy, the better for the currency. Sterling was also helped by better-than-expected purchasing managers index flash survey data for February.
The U.S. dollar has been weighed down by a string of soft labour data, even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.
Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.
“Our view remains that the Fed will hold the line and remain very cautious about tapering asset purchases. We think it will keep communicating that tightening is very far off, which should dampen pro-dollar sentiment,” said UBS Global Wealth Management strategist Gaétan Peroux and analyst Tilmann Kolb.
ING analysts said “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher”.
They see the greenback index trading down to the 90.10 to 91.05 range.
The euro rose 0.4% to $1.2134. The single currency showed little reaction to purchasing manager index data, which showed a slowdown in business activity in February. However, factories had their busiest month in three years, buoying sentiment.
The dollar bought 105.39 yen, down 0.3% and a continued retreat from the five-month high of 106.225 reached Wednesday.
(Editing by Hugh Lawson and Pravin Char)
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