OREANDA-NEWS. Fitch Ratings has affirmed Bank of New Zealand Limited's (BNZ, AA-/Stable/F1+) NZD4.2bn outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. Offshore covered bonds are issued through BNZ International Funding Ltd, a guaranteed issuing vehicle used for international funding by BNZ. Offshore issuance through BNZIF accounts for 71.2% of BNZ's total covered bond issuance.

KEY RATING DRIVERS

The rating is based on BNZ's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 notches (moderate high), and the asset percentage (AP) relied upon in Fitch's analysis of 84.4%, which is the highest nominal AP over the past 12 months and provides a small buffer of protection compared to Fitch's breakeven AP of 87%. The Outlook on the covered bonds reflects the Stable Outlook on BNZ's IDR.

The 'AAA' breakeven AP of 87% corresponds to a breakeven overcollateralisation (OC) of 14.9%. The asset disposal loss component of 20.4% remains the main driver of the 'AAA' breakeven OC. It reflects the impact of maturity mismatches between assets and liabilities with the cover assets having a weighted-average life of 14.2 years and the covered bonds 3 years, as well as the effect of the pro-rata sales clause in the programme, which limits the amount of assets that can be sold for any one bond.

The credit loss component remains unchanged at 4.2%, reflecting the stable credit quality of the cover pool. The cash flow component reduces the OC by 7.8%, representing the amount of excess spread modelled by Fitch in the programme. The breakeven AP considers whether timely payments are met in an 'AA' scenario and tests for recoveries given default of at least 91% in an 'AAA' scenario.

The unchanged D-Cap of 3 notches reflects Fitch's moderate high risk assessment for the liquidity gap and systemic risk component. This is driven by the 12-month liquidity protection in place in the form a pre-maturity test for the hard bullet and the extension period on the soft bullet bonds issued.

As of 21 June 2016, the cover pool consisted of 29,748 loans secured by first-ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD4.8bn. The cover pool's weighted average loan-to-value ratio is 50.5% and the weighted average seasoning of the loans is 41 months.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: BNZ's IDR is downgraded by three notches; the D-Cap falls by more than three notches; or the AP that Fitch takes into account in our analysis rises above the 'AAA' breakeven AP of 87%.

Fitch's 'AAA' 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 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.