Fitch Rates ANZ's Series 2016-2 GBP500m Covered Bonds 'AAA'; Outlook Stable
KEY RATING DRIVERS
The rating is based on ANZ's Long-Term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 3 notches, and the asset percentage (AP) of 87.0% used in the programme's asset coverage test - which is lower than Fitch's 'AAA' break-even AP of 89.5%. These factors support a 'AA' tested rating on a probability-of-default (PD) basis, and a 'AAA' rating after giving credit for recoveries given default of the covered bonds. The Outlook on the covered bonds reflects the Stable Outlook on ANZ's IDR.
The 89.5% 'AAA' break-even AP corresponds to a break-even over-collateralisation (OC) of 11.7%. The asset-disposal loss component of 14.4% remains the main driver, due to significant maturity mismatches between the cover pool and covered bonds (cover assets at 16.1 years versus liabilities at 4.4 years) and the refinancing assumptions applied to Australian residential mortgages. This is followed by the cover pool's credit loss component of 4.2%. Credit given to excess spread under the cash flow valuation component reduced the 'AAA' break-even OC by 5.7%.
The 'AAA' rating would be vulnerable to a downgrade if any of the following were to occur: (i) ANZ's IDR were to be downgraded by three notches to 'A-'; (ii) the Discontinuity Cap were to fall by three notches to 0 (full discontinuity); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis were to rise above Fitch's '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.