OREANDA-NEWS. Fitch Ratings has assigned National Australia Bank Limited's (NAB, AA-/Stable/F1+) Series 25 EUR750m mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance to AUD19.3bn. The fixed-rate bond is due in November 2022, and benefits from a 12-month extendable maturity.

KEY RATING DRIVERS
The rating is based on NAB's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 4 (moderate), and the asset percentage (AP) relied upon in Fitch's analysis of 89.5%, which is used in the asset coverage test and is equal to Fitch's break-even AP. This supports 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 NAB's IDR.

The 'AAA' break-even AP of 89.5% corresponds to a break-even overcollateralisation (OC) of 11.7%. The asset-disposal loss component of 13.9% remains the main driver of the break-even OC due to the significant maturity mismatch between the cover assets (16.2 years) and the liabilities (5.4 years). This is followed by the cover pool's credit loss of 3.9%. The cash-flow valuation component reduces the 'AAA' break-even OC by 5.2%, reflecting the longer weighted-average life of the assets versus the outstanding liabilities and the excess spread available under the programme.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: NAB's IDR is downgraded by four notches; the D-Cap falls by more than three categories; or the AP that Fitch takes into account in our analysis rises above the 'AAA' break-even AP of 89.5%.

Fitch's 'AAA' break-even 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' break-even AP to maintain the covered bond rating cannot be assumed to remain stable over time.