Fitch Affirms CBA's Mortgage Covered Bonds at 'AAA'; Revises D-Cap
The rating action and revised D-Cap follows the addition of 12-month extendible maturities (soft bullet) to CBA's outstanding benchmark covered bonds after bondholders' consent. The conversion of these bonds, which were originally issued with hard bullet maturity dates, brings the total amount of soft bullet bonds to 84% of the outstanding covered bonds' balance. The remaining hard bullet series have scheduled maturity dates from February 2017 up to August 2031.
KEY RATING DRIVERS
The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', the D-Cap of 4 and the asset percentage (AP) of 89.5% used in the programme's asset coverage test which is equal to Fitch's 'AAA' breakeven AP, supporting a 'AA' tested rating 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 CBA's IDR.
Fitch has revised the liquidity gap and systemic risk component of its D-Cap analysis to 'Moderate' (D-Cap of '4') from 'Moderate High' (D-Cap of '3'). While hard bullet bonds remain outstanding on the programme, we believe they would not be the primary driver in causing a cross acceleration in a covered bond default scenario, notwithstanding the limited cure period for these hard bullet bonds. In our view, the change to soft bullet on the benchmark covered bonds considered in the solicitation constitutes an effective mitigant against liquidity gaps in the programme. Extendible maturities create a period during which liquidity can be raised from the cover pool should it become the sole source of payment.
There is no change to the break-even AP of 89.5% as the programme continues to show significant asset/liability mismatches. The weighted life of the assets is 15 years compared with 4.3 years of the covered bonds.
The 'AAA' rating would be vulnerable to downgrade should any of the following occur: CBA's IDR was downgraded by four notches to 'BBB+'; the D-Cap fell by four categories to 0 (full discontinuity); or the AP that Fitch takes into account in its analysis increased above the 'AAA' breakeven AP of 89.5%.
Fitch's 'AAA' 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 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.