Fitch Ratings has affirmed Credit Suisse AG's (CS; A-/Stable/F1) and Credit Suisse (Schweiz) AG's (CS Switzerland; A/Stable/F1) mortgage covered bonds at 'AAA'.

The Outlooks are Stable.

The affirmation follows the one-notch downgrades of the two Credit Suisse entities' Issuer Default Ratings (IDR) (see 'Fitch Downgrades Credit Suisse Group to 'BBB+'; Stable Outlook' published 18 May 2022).

KEY RATING DRIVERS

The covered bonds' 'AAA' ratings are based on CS Switzerland's and CS's Long-Term IDRs, the various uplifts above the IDR granted to the programmes and the over-collateralisation (OC) protection provided through the programmes' asset percentages (AP).

CS Switzerland

CS Switzerland's covered bonds are rated five notches above the bank's 'A' IDR. This is out of a maximum achievable uplift of 10 notches, consisting of an IDR uplift of two notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of two notches.

For CS Switzerland's covered bonds, Fitch relies on the highest level of AP over the last 12 months of 56.4%, which provides more protection than Fitch's revised 'AAA' breakeven (BE) AP of 94.5%. The maximum AP under the asset coverage test is 95%.

The rating for the covered bonds was previously based on a two-notch uplift for recoveries above the 'AA' rating floor for the covered bonds. Following the IDR downgrade, the 'AAA' rating can only be reached by testing cash flows for timely payment, which results in an updated 'AAA' BE AP of 94.5% and equates to an OC of 5.8%. This level allows the covered bonds to attain a timely payment rating level of 'AA' and two notches of recovery uplift to 'AAA'.

The main component of the BE AP is the ALM loss of 3%, which is driven by the modelled negative carry in a low interest rate and high prepayment scenario. In Fitch's cash flow analysis, we test for recourse to the cover pool during the first six quarters, and at the lower of the first upcoming bond maturity and the weighted average life of the assets. This results in the most stressful scenario being an issuer default in the first quarter, with high prepayment rates and increased reinvestment cost until the maturity of the outstanding covered bonds. The credit loss component of 2.9% continues to be driven by the portfolio loss floor in the 'AA' rating scenario.

The Stable Outlook on CS Switzerland's covered bonds reflects a five-notch buffer against an IDR downgrade.

CS

CS's covered bonds are rated six notches above the bank's 'A-' IDR. This is out of a maximum achievable uplift of eight notches, consisting of a resolution uplift of two notches, a payment continuity uplift (PCU) of four notches and a recovery uplift of two notches.

For CS's covered bonds Fitch relies on the highest AP of the past 12 months of 82%, which provides more protection than Fitch's 'AAA' break-even (BE) AP of 87%.

The 'AAA' BE AP for CS's covered bonds has increased to 87% from 86%, corresponding to a BE OC of 14.9%. The main driver of the BE AP is the ALM loss of 11.9%. This is driven by the negative carry in a low interest rate and high prepayment scenario. Similar to CS Switzerland, the most stressful scenario is an issuer default in the first quarter, with high prepayment rates and increased reinvestment cost. The ALM loss is partially offset by the negative carry sized for in the programme's asset coverage test. The credit loss for the programme is unchanged at 2.9%, as it continues to be driven by the portfolio loss floor in the 'AA' rating scenario.

The Stable Outlook on CS's covered bonds reflects a two-notch buffer against an IDR downgrade.

Uplifts

The two-notch resolution uplift for the two programmes reflects that collateralised covered bonds in Switzerland are exempt from bail-in; that Fitch deems the risk of under-collateralisation at the point of resolution to be sufficiently low; and that a resolution of CS or CS Switzerland, should it happen, is not likely to result in the direct enforcement of the recourse to the cover pool.

The six-notch PCU for CS Switzerland reflects principal liquidity protection provided by the 12-month maturity extension provision, as well as a dynamic reserve that will cover three months of senior expenses and interest payments. The reserve will be funded when CS Switzerland is rated below 'A' and 'F1'.

The four-notch PCU for CS reflects the principal liquidity protection in the form of a dynamic reserve that will provide liquidity protection from nine months before the principal repayment of the hard-bullet bond, as well as a dynamic reserve that will cover three months of senior expenses and interest payments. The latter has been funded as the issuer is rated below the 'F1+' trigger.

The recovery uplift for the CS and CS Switzerland programmes is two notches, as Fitch expects outstanding recoveries from the cover pool consisting of standard mortgage loans, the programmes' timely payment rating levels are in the investment-grade range and no material downside risk to recoveries have been identified. Fitch deems that the foreign-exchange risk for the CS programme in a recovery given-default scenario is mitigated by the shorter weighted-average life of the assets than the liabilities.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The covered bonds are rated 'AAA', which is the highest level on Fitch's scale and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

CS Switzerland:

A downgrade of CS Switzerland's Long-Term IDR by six or more notches to 'BB' or below.

The 'AAA' rating would be downgraded by one notch to 'AA+' if the AP increases to the maximum AP under the asset coverage test of 95.0%.

CS:

A downgrade of CS's Long-Term IDR by three or more notches to 'BBB-' or below.

The 'AAA' rating would not be vulnerable to a downgrade if the AP increases to the maximum AP under the asset coverage test of 85.0%.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The covered bonds' ratings are driven by the credit risk of the issuers as measured by their Long-Term IDRs.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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