OREANDA-NEWS. Fitch Ratings says Commonwealth Bank of Australia's (CBA; AA-/Stable/F1+) proposal to convert certain existing hard-bullet covered bonds to soft bullets with an extendible maturity of 12 months will have no immediate rating impact on the bonds. The proposed change is contingent on investor approval.

CBA is seeking investor consent for the implementation of a 12-month extendable maturity (soft bullet) for seven of the eight benchmark bonds issued with a fixed scheduled maturity date (hard bullet), constituting 39.1% of the outstanding covered bond balance. The remaining US dollar-denominated bond (Series 13) is not part of the investor consent solicitation.

In Fitch's view the proposed change would reduce liquidity risk for the covered bond programme as a whole. Nevertheless, we do not expect the change to affect the ratings of the covered bonds, which are rated 'AAA/Stable'.

In a programme that has both hard- and soft-bullet bonds outstanding, Fitch looks at the weakest link in its assessment of the liquidity gap and systemic risk in its Discontinuity Cap (D-Cap) analysis. Currently this is driven by the 12-month pre-maturity test cure period provisions on the hard-bullet covered bonds. Extendible maturities provide a period during which liquidity can be raised from the cover pool should recourse switch from the issuer.

The current D-Cap assigned to the programme is 3 notches (moderate high risk). After the investor solicitation process, if the proportion of outstanding hard-bullet covered bonds subsequently falls to a sufficiently low level, and results in this factor not being the primary driver of a cross-acceleration of the covered bonds in a default scenario, then Fitch may increase the D-Cap.

Fitch notes that such changes have the potential to positively impact the break-even asset percentage, as the asset/liability maturity mismatches and the need to liquidate would decrease slightly when the maturity extension is taken into account. However, in the case of CBA's programme, it is unlikely that there will be any change in the break-even asset percentage as the programme continues to show significant asset/liability mismatches. The weighted life of the assets is 15 years compared with 4.3 years of the covered bonds. Fitch will make further comment once the investor solicitation process is finalised and amendments, if any, are put in place.