OREANDA-NEWS. Fitch Ratings has assigned a 'AA+(EXP)' rating with Stable Outlook to Kookmin Bank's (KB; A/Stable) inaugural series of mortgage covered bonds to be issued under the Korean covered bond legislation.

The mortgage covered bonds are issued under KB's newly established covered bond programme governed by the Korean Covered Bond Act. Under this programme, KB can periodically issue up to USD8bn of covered bonds secured on a dynamic pool of Korean residential mortgage loans.

KEY RATING DRIVERS
The 'AA+(EXP)' rating is based on KB's Long-Term Issuer Default Rating (IDR) of 'A', a Discontinuity Cap (D-Cap) of 4; and the asset percentage (AP) to be disclosed in the issuer's investor report, which is expected to be equal to or lower than Fitch's breakeven AP for a 'AA+' rating of 85.5%. The Outlook on the covered bonds reflects the Stable Outlook on KB's IDR.

The D-Cap of '4' reflects Fitch's "moderate" discontinuity risk assessment related to the liquidity gap and systemic risk and the cover pool-specific alternative management components. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch believes that a successful sale of the cover assets would be possible within the extendible maturity of 12 months of the expected issuance, based on Fitch's issuance parameters in its analysis, which is also envisaged in the documentation to make timely payments on the covered bonds. Furthermore, the cover-pool specific alternative management assessment addresses both the quality and quantity of the data provided by the issuer.

The 'AA+' breakeven AP of 85.5%, corresponding to a breakeven overcollateralisation (OC) of 17%, is driven by the cash flow valuation component of 9.6% due to the stressed weighted average life of the assets versus the liabilities. This is followed by the asset disposal loss of 5.6%, reflecting the maturity mismatches and the refinancing assumptions applied to Korean mortgages, and finally the cover pool's credit loss of 3.7% in a 'AA+' scenario. The breakeven AP considers whether timely payments are met in a 'AA-' scenario and tests for recoveries given default of at least 91% in a 'AA+' scenario.

At end-April 2015, the cover pool consisted of 16,311 loans secured by first-ranking mortgages of Korean residential properties with a total outstanding balance of KRW2.34trn. The portfolio has a weighted average (WA) current loan-to-value ratio (CLTV) of 43.4% and is 18 months seasoned. By current balance, 50.1% of the pool comprises loans with an interest-only period that covert to full amortisation, 86% of the loans are hybrid loans of floating and fixed rate, and 98.4% of the loans are secured by apartments. The cover pool is geographically diversified across Korea with the largest exposures in Kyounggi (42.5%) and Seoul (29.8%). Fitch's calculated 'AA+' expected loss on the residential mortgage assets is 3.6%. The assets have a WA life of approximately 15.5 years.

In a deviation from its APAC Residential Mortgage Criteria, the agency used a delinquency multiple of 2x on the WA frequency of foreclosure at the tested rating on a probability of default basis. In its cash flow modelling of the asset cash flows, this multiple stresses the level of loans falling delinquent in the cover pool over a period of time, curing thereafter.

EXPECTED RATING SENSITIVITIES
The 'AA+(EXP)' rating would be vulnerable to downgrade if any of the following occurred: (i) KB's IDR was downgraded by three notches to 'BBB'; (ii) the D-Cap fell by three categories to 1 (very high); or (iii) the AP that Fitch takes into account in its analysis increased above Fitch's 'AA+' breakeven AP of 85.5%; or (iv) if the country ceiling of Korea was revised to 'AA' or below

Fitch's 'AA+' 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 'AA+' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.