Fitch: No Impact on Abbey's Covered Bonds Rating From Planned Issuer Substitution
OREANDA-NEWS. Fitch Ratings says there is no rating impact on Abbey National Treasury Services plc's (Abbey; A/Positive/F1) mortgage covered bonds (AAA/Stable) from the planned issuer substitution due to become effective on 1 June 2016.
In Fitch's view, the planned issuer substitution is neutral for the covered bond programme as payments of all amounts due in respect of the covered bonds have been unconditionally guaranteed by Santander UK plc (SANUK; A/Positive/F1), which is rated at the same level as Abbey. Abbey is a fully integrated wholly-owned subsidiary and a main funding vehicle of SANUK and all its obligations are guaranteed by SANUK. SANUK is regulated by the UK Prudential Regulation Authority on a standalone basis and it is managed and funded separately from its parent, Banco Santander SA (A-/Stable/F2).
Following the issuer substitution, the covered bond obligations and other obligations of Abbey under the programme documents will be transferred to SANUK. Any new issuances will be issued by SANUK instead of Abbey, and remain guaranteed by the assets owning special purpose vehicle, Abbey Covered Bonds LLP.
Fitch notes that the interest rate swap on the cover pool was novated to SANUK from Abbey on 30 March 2016. The interest payable and receivable under the new swap agreement are identical to those of the old agreement. The total return swap continues to transform interest collections (both fixed and floating rates) on the mortgages into Libor plus a spread.
Fitch's assessment that the issuer substitution will not negatively impact the mortgage covered bonds' rating is based on SANUK's Long-term Issuer Default Rating (IDR) of 'A', an IDR uplift of 1, a Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the 89.28% asset percentage (AP) that is used in the asset coverage test as disclosed in the investor report, which provides more protection than the 92.0% 'AAA' breakeven AP. The cover pool will continue to consist in UK residential mortgage loans originated by SANUK, meeting unchanged eligibility criteria stipulated in the programme documentation.
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.