Fitch Affirms Westpac's Mortgage Covered Bonds at 'AAA'/Stable
KEY RATING DRIVERS
The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 4 notches and the asset percentage (AP) of 89% used in the programme's asset coverage test, which Fitch relies upon in its analysis. This AP is lower than Fitch's revised 'AAA' breakeven AP of 90.5% and supports a 'AA' tested rating on a probability-of-default basis and a 'AAA' rating after giving credit for recoveries from the cover assets given default of the covered bonds. The Outlook on the covered bonds reflects the Stable Outlook on WBC's IDR.
The 'AAA' breakeven AP of 90.5%, corresponding to a breakeven overcollateralisation of 10.5%, is driven by an asset disposal loss component of 14.6%. This reflects the significant maturity mismatches modelled in the programme, with the weighted-average residual life of the assets at 15.1 years and the liabilities at 3.4 years. The credit loss component contributes 3.8%, which has increased marginally due to the reduced lenders' mortgage insurance coverage in the cover pool (currently 9.1% of total pool balance). The stressed cash flow valuation component decreases the breakeven over-collateralisation by 6.7%, due to the available excess spread modelled by Fitch in the programme.
The 'AAA' breakeven AP has changed from last analysis, as Fitch has fine-tuned its approach to modelling the pro-rata asset sales clause, which used to restrict the sale of assets in the programme after an issuer event of default.
The D-Cap is unchanged at 4 notches and is driven by Fitch's moderate risk assessment in four of five components: liquidity gap and systemic risk component, systemic alternative management component, cover pool specific alternative management component and privileged derivatives component. The asset segregation component remains very low risk.
The cover pool consisted of 133,080 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of approximately AUD34.6bn, as at end-July 2016. The cover pool's weighted average current loan/value ratio (LVR) was 61.4%, the Fitch calculated weighted-average indexed current LVR was 57.5% and the loans' weighted-average seasoning was 55 months.
The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: Westpac Banking Corporation's Issuer Default Rating is downgraded by 4 notches; the Discontinuity Cap falls by 4 notches; or the asset percentage (AP) that Fitch takes into account in its analysis rises above the 'AAA' breakeven AP of 90.5%.
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, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time.