OREANDA-NEWS. Fitch Ratings has affirmed Kiwibank Limited's (KWB, 'AA'/Positive/'F1+') NZD 191m of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. These covered bonds are guaranteed by Kiwi Covered Bond Trust Limited, a bankruptcy-remote special purpose vehicle established under the laws of New Zealand.

KEY RATING DRIVERS
The rating is based on: KWB's Long-Term Issuer Default Rating (IDR) of 'AA'; the unchanged Discontinuity Cap (D-Cap) of 3; and the highest nominal asset percentage (AP) in the last 12 months (60.6%), as KWB's Short-Term IDR is above 'F3'. This provides a large buffer when compared to Fitch's 'AAA' breakeven AP of 90% supporting a 'AAA' rating after giving credit for recoveries given default of the covered bonds. This is equal to the maximum AP set in the programme documentation. The Outlook on the covered bonds' reflects the significant buffer against downgrade of the issuer's IDR.

The 'AAA' breakeven AP of 90%, corresponding to a breakeven overcollateralisation (OC) of 11.1% is driven by the asset disposal loss component of 13.5% due to the stressed valuation of the entire cover pool after an assumed covered bond default. This is followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario which has remained stable. The cash flow valuation component reduces the 'AAA' breakeven OC by 7.3% due to the excess spread available under the programme.

As of 30 November 2015, the cover pool consisted of 2,403 loans secured by first-ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD316m. Fitch's calculated 'AAA' expected loss is 4.0% on the residential mortgage assets, driven by the minimum credit loss at 'AAA' in the agency's analysis. The weighted-average (WA) loan/value ratio (LVR) of the cover pool is 56.6%, Fitch's calculated WA indexed LVR is 50% and the pool is seasoned by 57 months.

With only one bond outstanding, the maturity mismatch remains significant with the WA residual life of the assets at 11.2 years and the liability at 5.0 years.

The unchanged D-Cap of 3 reflects Fitch's assessment of liquidity gap and systemic risk component, which is the main driver of the D-Cap assigned. The assessment reflects the agency's view of the programme's liquidity gap mitigants in the form of a three-month interest reserve fund and 12 month extension period on soft bullet covered bonds.

For programmes that have not publicly issued for more than two years, Fitch may adjust the cover pool-specific alternative management component of the D-Cap, notably to reflect the risk of OC and asset pool quality not being maintained by the issuer. However, the agency has not lowered the D-Cap for this programme, as it believes it is unlikely the issuer will provide less support for this programme. Furthermore, the programme is registered with the Reserve Bank of New Zealand, which in Fitch's view increases the level of oversight on the programme.

RATING SENSITIVITIES
The 'AAA' rating of KWB's covered bonds is vulnerable to a downgrade if KWB's IDR is downgraded by four notches to 'A-'. The covered bonds' rating could be maintained even if the D-Cap was reduced to 0 (full discontinuity), subject to a satisfactory level of AP, given the issuer's current IDR of 'AA', which enables the bonds to reach 'AAA' taking only recoveries into account.

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.