Fitch: No Rating Impact on UBS AG's Covered Bonds from Switch to Soft Bullet
UBS is seeking investor consent for the implementation of a 12-month extendible maturity (soft bullet) for two of its six covered bonds series issued with fixed maturity dates (hard bullet), constituting 48% of the outstanding covered bonds balance. There is already one soft bullet covered bond (18%). Further hard-bullet bonds that are not part of the consent solicitation are denominated in EUR (27%), USD (5%) and NOK (2%), which mostly mature in early 2017. However, the issuer has stated that it may approach bondholders of the other hard bullet covered bonds with a similar amendment.
In Fitch's view, the proposed change would reduce liquidity risk as the proposed 12-month maturity extension provides a higher level of protection against liquidity risk than the current liquidity provision of a nine month pre-maturity test. Extendible maturities create a period during which liquidity can be raised from the cover pool, without incurring forced asset sales, should the cover pool become the sole source of payment.
However, as a material portion of bonds will remain hard-bullet maturities the liquidity gap and systemic risk assessment would remain unchanged. The D-Cap of '3' (moderate high risk) is driven by a dual weak link for the liquidity gap and systemic risk, and systemic alternative management while the privileged derivatives components, specific alternative management and asset segregation remain at moderate risk.
Fitch notes that changes could positively impact the 'AAA' break-even asset percentage for the covered bond programme as maturity mismatches and the need to liquidate assets could decrease. We will conduct a full analysis if and when the amendments are put in place.
Fitch does not view this planned modification of the bonds' terms and conditions as a default or distressed debt exchange (see 'Distressed Debt Exchange' dated 8 June 2016 at www. fitchratings. com). This is because the new provisions are not aimed at preventing an imminent default of any covered bond issuer and will only be implemented if they are approved by no less than three-quarters of the votes cast by the required quorum.