OREANDA-NEWS. Fitch Ratings has assigned a 'AAA(EXP)' rating with a Stable Outlook to Macquarie Bank Limited's (MBL, A/Stable/F1) inaugural series of mortgage covered bonds to be issued from its programme.

The programme was established in June 2015, and allows MBL to periodically issue up to AUD5bn of bonds secured by a dynamic pool of Australian residential mortgage loans. The covered bonds are guaranteed by Perpetual Limited as trustee of the MBL Covered Bond Trust.

KEY RATING DRIVERS
The 'AAA(EXP)' rating is based on MBL's Long-Term Issuer Default Rating (IDR) of 'A', a Discontinuity Cap (D-Cap) of 4 notches, and the asset percentage (AP) to be disclosed in the issuer's investor report, which is expected to be equal to or lower than Fitch's break-even AP for a 'AAA' rating of 89.5%. The Outlook on the covered bonds reflects the Stable Outlook on MBL's IDR.

The D-Cap of '4' notches reflects Fitch's 'moderate' discontinuity risk assessment on the following four components: liquidity gaps and systemic risk, systemic alternative management, cover pool-specific alternative management, and privileged derivatives.

In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch believes that a successful sale of the cover assets would be possible within the extendible maturity of 12 months expected for a soft-bullet issuance or within the 12-month pre-maturity test for a hard bullet issuance, which is envisaged in the documentation to make timely payments on the covered bonds. The systemic alternative management assessment addresses the significant roles performed following issuer default by the covered bond guarantor, or third parties acting on its behalf. The cover pool-specific alternative management assessment addresses both the quality and quantity of the data provided by the issuer and its IT systems. The privileged derivatives assessment reflects the materiality of the swaps to the programme.

The 'AAA' break-even AP of 89.5%, corresponding to a break-even overcollateralisation (OC) of 11.7%, is driven by the asset disposal loss of 21%, reflecting the maturity mismatches in the programme upon issuance and the refinancing assumptions applied to Australian residential mortgages. This is followed by the cover pool's credit loss of 4.1% in a 'AAA' scenario, and finally the cash flow valuation component - which reduces the OC by 1.4% due to the excess spread under the programme based on a stressed weighted-average (WA) life of the assets versus the liabilities expected to be issued from the programme. The break-even AP takes into consideration whether timely payments are met in a 'AA' scenario, and tests for recoveries given default of at least 91% in a 'AAA' scenario.

As of 31 December 2015, the cover pool consisted of 3,827 loans secured by first-ranking mortgages over Australian residential properties with a total outstanding balance of AUD2bn, a weighted-average (WA) current loan/value ratio (LVR) of 70.3%, and a Fitch-calculated WA indexed LVR of 68.4%. Investment loans comprise 31.1% of the pool by balance, and interest-only loans 47.0%. Fitch's calculated 'AAA' expected loss is 3.9% of the residential mortgage assets, which benefits from credit to lenders mortgage insurance.

RATING SENSITIVITIES
The 'AAA(EXP)' rating would be vulnerable to a downgrade if any of the following were to occur: MBL's IDR is downgraded by two notches to 'BBB+'; the D-Cap falls by two notches to 2 (high discontinuity); or the AP rises above our '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.