Fitch: No Rating Impact from Planned Switch to Soft Bullet on NAB Covered Bonds
NAB is seeking investor consent for the implementation of a 12-month extendible maturity (soft bullet) for its Series 1, 2, 6 and 10 covered bonds denominated in euros, Norwegian krone and pound sterling, all of which are issued with a fixed scheduled maturity date (hard bullet), constituting 16.1% of the outstanding covered bond balance. If converted, the programme's total percentage of issuance as a soft bullet would equate to 83.4%, all else being equal. The remaining US dollar-denominated benchmark hard bullet bond (Series 5) is not part of the investor consent solicitation.
Fitch believes the proposed change would continue to mitigate liquidity gaps in the programme. Extendible maturities create a period during which liquidity can be raised from the cover pool should the cover pool become the sole source of payment. The proposed maturity extension provides a comparable level of protection against liquidity risk, as the current liquidity provision is in the form of a 12-month pre-maturity test - which features a cure period of 10 business days following a breach of the test.
The current Discontinuity Cap (D-Cap) for the programme would remain unchanged at '4' (moderate risk) should any or all of the bonds subject to the consent solicitation be converted. It reflects Fitch's assessment of the liquidity gap and systemic component which is driven by the agency's view of the liquidity gap mitigants, in the form of a three-month interest reserve fund which will be funded at the loss of 'F1+'; the 12-month extension period for the issued soft bullet bonds; and the pre-maturity test for the issued hard bullet bonds.
The changes could have a positive impact on the 'AAA' break-even asset percentage for the covered bond programme, as it driven by the asset and liability mismatches and the need to liquidate. When the maturity extension is taken into account these mismatches will decrease slightly, but the overall impact may be minimal (all else being equal) as they remain a significant driver to the break-even AP. Fitch will conduct a full analysis as and when the amendments are put in place.