Fitch Affirms Abbey National Treasury Services Covered Bonds at 'AAA'; Outlook Stable
KEY RATING DRIVERS
The rating is based on Abbey's Long-term Issuer Default Rating (IDR) of 'A', a revised IDR uplift of 1, an unchanged Discontinuity Cap (D-Cap) of 4 notches (Moderate risk) and the 89.28% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 92% 'AAA' breakeven AP. Any potential upgrade of Abbey's IDR, which is currently on Positive Outlook, will increase the rating buffer of the covered bonds, which is already at the highest 'AAA' level.
The 92% 'AAA' breakeven AP, corresponding to a breakeven OC of 8.7%, is driven by a credit loss of 7.5% in a 'AAA' scenario, followed by an asset disposal loss component of 5.6%. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 3.3%, due to excess spread. The programme's asset disposal loss component is smaller than its peers because the programme has a supplemental reserve in the form of mortgages (5%). The reserve mitigates the programme constraint that limits the amount of mortgages selected for sale for bond repayment following a switch of the recourse to the cover pool.
The 7.5% 'AAA' credit loss represents the impact on the breakeven OC from a 20.1% WA default rate and a 65.2% WA recovery rate for the mortgage cover assets. The 'AAA' credit loss is a decrease from 9.1% in 2014 as a result of a decrease in the weighted average (WA) sustainable loan-to-value ratio over the same period.
The IDR uplift is revised to one notch from zero, reflecting the increase in the senior unsecured debt to over 5% of total adjusted assets at Abbey's group level in the UK. No further IDR uplift based on the bank's size has been assigned given the bank's small share by total assets, despite the bank's notable mortgage market share in the UK. In addition, the regulator has yet to announce the list of domestic systemically important banks in the UK. The unchanged D-Cap of 4 reflects our moderate risk assessment for four out of five components. The remaining component - asset segregation - has a very low risk assessment.
The 89.28% AP is the contractual AP used in the asset coverage test in the programme.
The 'AAA' covered bond rating will be downgraded if i) the issuer's IDR is downgraded by three or more notches to 'BBB' or below, ii) the total number of notches from the IDR uplift and the D-Cap is reduced to one or lower, or iii) the AP is higher than the 'AAA' breakeven AP at 92%.
On 22 September 2015, Fitch published an exposure draft for UK residential mortgage assumptions. The proposed criteria, if adopted, will lead to smaller loss expectations for all types of mortgage portfolios. As a result, Fitch expects all outstanding UK RMBS and CVB ratings to either be affirmed or upgraded. If the current criteria are updated after considering market feedback, Fitch will review the existing ratings accordingly.
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.
More details on the cover pool and Fitch's analysis will be available in a credit update, which will shortly be available at www.fitchratings.com.