OREANDA-NEWS. Fitch Ratings has affirmed UBS AG's (UBS, A/Positive/F1) CHF9.3bn equivalent outstanding mortgage covered bonds at 'AAA' with Stable Outlook.

KEY RATING DRIVERS
The rating is based on UBS's Long-term Issuer Default Rating (IDR) of 'A', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap of 3 (moderate high risk) and the 86% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 'AAA' breakeven AP of 87%. The Stable Outlook on the covered bonds rating is underpinned by the Positive Outlook on UBS.

The 'AAA' breakeven AP of 87% corresponds to a breakeven over-collateralisation (OC) of 14.9%. The main breakeven OC component is an asset disposal loss of 10.7%, reflecting the programme`s sensitivity to deferred cash flows after the interest reset dates. This leads to an increased need for forced asset sales in a stressed market environment and for sharp discounts to ensure timely payment in this scenario as the weighted average life (WAL) of the assets exceeds that of the covered bonds.

Also driving the breakeven OC is a 'AAA' credit loss of 4.2%, reflecting a weighted average (WA) default rate of 21.4% and an 81.3% WA recovery rate for the cover pool. The third driver of the breakeven OC is the cash flow valuation component (3.4%), primarily due to the differences between the stressed present values of the programme's assets and liabilities. This is a result of the 8.5 years difference between the modelled WA life of the cover assets and the covered bonds on the fully hedged portfolio. Cash flows were modelled on an assumed annual prepayment rate of 3% in the worst case scenario.

As announced, UBS bought back 1.6bn of its USD-denominated covered bonds in December. After this buy-back, the outstanding mortgage covered bonds of CHF9.3bn were secured by a cover pool of CHF13.4bn of residential mortgages secured on 31,977 Swiss properties.

All of the issued covered bonds are fixed-rate and denominated in foreign currencies (81% in euros, 18% in US dollar and 1% in Norwegian krone). The guarantor hedges interest rate and foreign exchange risks between the cover assets and the covered bonds. UBS acts as swap provider, subject to collateralisation and best-effort replacement triggers.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) UBS's Issuer Default Rating (IDR) is downgraded by three or more notches to 'BBB' or below; or (ii) the sum of notches represented by the IDR uplift and the Discontinuity Cap is reduced by three or more notches; or (iii) the asset percentage (AP) that Fitch considers in its analysis increases above the 'AAA' breakeven level of 87%.

The Fitch breakeven AP for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.