OREANDA-NEWS. Fitch Ratings has affirmed UBS AG's (UBS, A/Stable/F1) CHF10.8bn equivalent outstanding mortgage covered bonds at 'AAA' with Stable Outlook. The affirmation follows a legal and organisational restructuring of UBS and UBS Switzerland AG, the newly established domestic subsidiary of UBS (see Fitch's Rating Action Commentary 'Fitch Assigns Ratings to UBS Switzerland; Affirms UBS AG at 'A'' on www.fitchratings.com).

KEY RATING DRIVERS
The rating is based on UBS's and UBS Switzerland's Long-term Issuer Default Ratings (IDRs) of 'A', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the maximum 86% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 'AAA' breakeven AP of 87.0%. The Stable Outlook on the covered bonds rating reflects that on UBS.

UBS has established a new subsidiary, UBS Switzerland, and transferred the businesses booked in its retail & corporate division and the Switzerland-booked business in its wealth management division to the new subsidiary, on 14 June 2015, since when it has become operational. UBS Switzerland will be responsible for the residential mortgage business relevant for the covered bonds programme. A joint and several liability arrangement has been put in place, under which UBS Switzerland assumes a contractual joint and several liability for all contractual obligations of UBS outstanding at the time of the asset and liability transfer, including UBS`s mortgage covered bonds.

Fitch further understands from UBS that it will cease issuing any covered bonds under this programme as newly issued covered bonds would not benefit from this joint and several liability arrangement. Fitch has decided to classify the programme as being in wind-down. However, the agency has not adjusted downwards the D-Cap assessment for the programme, given its importance to the issuer, with many investors also being key investors in other debt instruments of UBS. Therefore it considers the risk of the issuer providing less resources and support for the programme as negligible.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) UBS's and UBS Switzerland's IDRs are downgraded by three or more notches to 'BBB' or below; or (ii) the sum of notches represented by the IDR uplift and the D-Cap is reduced by three or more notches; or (iii) the AP that Fitch considers in its analysis increases above the 'AAA' breakeven level of 87.0%.

The Fitch breakeven AP for the covered bond rating will be affected, amongst 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.