Fitch Rates Westpac's USD1.5bn Covered Bonds 'AAA'
KEY RATING DRIVERS
The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 2 (high), and an asset percentage (AP) of 89.0%, which provides a small buffer to Fitch's breakeven AP of 89.5%, supporting a tested rating of 'AA' on a probability of default (PD) basis, and a 'AAA' rating after giving credit for recoveries. The Outlook on the covered bonds reflects the Stable Outlook on WBC's IDR.
The 'AAA' breakeven AP of 89.5%, corresponding to a breakeven overcollateralisation (OC) of 11.7%, is driven by an asset disposal loss component of 16.0% due to maturity mismatches and the refinancing assumptions applied to Australian residential mortgages, followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 7.9% due to the longer weighted average life of the assets versus the liabilities and excess spread available under the programme.
Maturity mismatches are significant, with the weighted average residual life of the assets being 15.5, and the liabilities 3.7 years.
The 'AAA' rating would be vulnerable to downgrade if: WBC's IDR were downgraded by two notches; the D-Cap fell by more than one category; or the AP that Fitch takes into account in its analysis increased above the 'AAA' breakeven AP of 89.5%.