Research: Rating Action: Moody’s Downgrades Turkish Covered Bonds Following Sovereign Rating Downgrade

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Three covered bond programs affected

London, August 16, 2022 — Moody’s Investors Service (“Moody’s”) has downgraded the ratings of covered bonds issued by three Turkish banks:

– Turkiye Garanti Bankasi AS – Mortgage covered bonds: downgraded from Ba3 to B1

– Akbank TAS – Mortgage Covered Bonds: downgraded from Ba3 to B1

– Yapi Kredi Bankasi AS – Mortgage covered bonds: downgraded from Ba3 to B1

RATINGS RATIONALE

Today’s rating action follows Moody’s recent decision to downgrade Turkey’s government bond rating to B3 from B2 and Moody’s lowering of the local currency bond cap from Turkey to B1 from Ba3 on August 12, 2022, which follows the downgrade of the sovereign rating. Turkish covered bond ratings are capped at Turkey’s local currency bond cap, as the caps generally act as the maximum ratings that can be assigned to a domestic issuer in Turkey, including Turkish asset-backed covered bonds. Today’s rating action means the B1 covered bond ratings are positioned two notches above the Turkish government issuer’s B3 rating and senior unsecured debt.

For more details on the sovereign ratings action, please refer to the sovereign press release: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_468377.

KEY ASSUMPTIONS/SCORING FACTORS

Moody’s determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis.

EXPECTED LOSS: Moody’s uses its covered bond model (COBOL) to determine a rating based on the expected loss on the bond. COBOL determines the expected loss as (1) a function of the probability that the issuer ceases to make payments under the covered bonds (such cessation, a CB anchor event); and (2) the estimated losses that will accrue to covered bondholders in the event of a CB Anchor Event. We express the probability of a CB anchor event as a point on our alphanumeric rating scale (i.e. CB anchor).

The CB anchor for all Turkish covered bonds is the issuing bank’s CR rating plus zero notch. The CR rating reflects an issuer’s ability to avoid defaulting on certain senior bank operational obligations and contractual commitments, including covered bonds.

The cover pool losses are an estimate of the losses that Moody’s currently models following a CB anchor event. Moody’s splits the pool’s losses between market risk and collateral risk. Market risk measures losses resulting from refinancing risk and risks related to interest rate and currency mismatches (these losses may also include certain legal risks). Collateral risk is derived from the collateral score, which measures the losses resulting directly from the credit quality of the assets in the cover pool.

The CB anchor for Akbank TAS – Mortgage Covered Bonds is B2, which is the CR rating of Akbank TAS plus 0 notches. The losses of the cover pool are 43.4%, with a market risk of 32.2% and a collateral risk of 11.2%. The collateral score for this program is currently 11.2%. The overcollateralization in this cover pool is 421.0%, of which the issuer provides 12.5% ​​on a “committed” basis. According to Moody’s COBOL model, the minimum overcollateralisation compatible with the B1 rating is 11.5%, of which 11.5% must be in “committed” form to be fully assessed (figures on a nominal basis). These figures show that Moody’s does not rely on “uncommitted” overcollateralization in its expected loss analysis.

The CB anchor for Turkiye Garanti Bankasi AS – Mortgage Covered Bonds is B2, which is the CR rating of Turkiye Garanti Bankasi AS plus 0 notches. The losses of the cover pool are 30.8%, with a market risk of 20.4% and a collateral risk of 10.4%. The collateral score for this program is currently 10.4%. The overcollateralization in this cover pool is 344.5%, of which the issuer provides 20.0% on a “committed” basis. According to Moody’s COBOL model, the minimum overcollateralisation compatible with the B1 rating is 11.5%, of which 11.5% must be in “committed” form to be fully assessed (figures on a nominal basis). These figures show that Moody’s does not rely on “uncommitted” overcollateralization in its expected loss analysis.

The CB anchor for Yapi Kredi Bankasi AS – Mortgage Covered Bonds is B2, which is the CR rating of Yapi ve Kredi Bankasi AS plus 0 notches. The losses of the cover pool are 27.4%, with a market risk of 16.9% and a collateral risk of 10.5%. The guarantee score for this program is currently 10.5%. The overcollateralization in this cover pool is 293.0%, of which the issuer provides 20.0% on a “committed” basis. According to Moody’s COBOL model, the minimum overcollateralisation compatible with the B1 rating is 11.5%, of which 11.5% must be in “committed” form to be fully assessed (figures on a nominal basis). These figures show that Moody’s does not rely on “uncommitted” overcollateralization in its expected loss analysis.

For details on cover pool losses, collateral risk, market risk, collateral score and TPI flex on covered bond programs rated by Moody’s, please refer to “Covered Bonds Sector Update”, published quarterly.

TPI FRAMEWORK: Moody’s assigns a “Timely Payment Indicator” (TPI), which is our assessment of the likelihood of timely payment of interest and principal to covered bondholders following a CB anchor event. TPIs are rated as Very High, High, Likely-High, Likely, Unlikely, or Very Unlikely. The TPI framework limits the rating of covered bonds to a certain number of notches above the CB anchor.

Moody’s has assigned a TPI Improbable to the above covered bond programs.

SCORING METHODOLOGY

The main methodology used in these ratings was “Moody’s Approach to Rating Covered Bonds” published in December 2021 and available on https://ratings.moodys.com/api/rmc-documents/360326. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS:

The CB anchor is the primary determinant of the rating robustness of a covered bond program. A change in the level of the CB anchor could lead to an upgrade or a downgrade of the covered bonds. The TPI Leeway measures the number of notches by which Moody’s could lower the CB anchor before the rating agency downgrades the covered bonds due to the constraints of the TPI framework.

The TPI assigned to each of these programs is improbable. The TPI Leeway for these programs is limited, and so any reduction in the CB peg may lead to a downgrade of the covered bonds.

A multi-notch covered bond downgrade may occur under certain circumstances, such as (1) a country cap or sovereign downgrade capping a covered bond rating or adversely affecting the CB anchor and TPI; (2) a demotion of several notches of the CB anchor; or (3) a substantial reduction in the value of the cover pool.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

Moody’s did not use any stress scenario simulations in its analysis.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the principal entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory information will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued [with/with no] modification resulting from this disclosure.

These ratings are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Alexander Zeidler
VP – Senior Credit Officer
Structured Finance Group
Moody’s Investors Service Ltd.
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London, E14 5FA
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JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

Jose de Leon
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

Release Office:
Moody’s Investors Service Ltd.
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Canary Wharf
London, E14 5FA
UK
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

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