OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to Macquarie Bank Limited's (MBL, A/Stable/F1) first issuance, Series 2016-1 EUR500m mortgage covered bond. The Outlook is Stable. The fixed-rate bond is due in March 2021, and benefits from a 12-month extendable maturity. The covered bonds are guaranteed by Perpetual Limited as trustee of the MBL Covered Bond Trust.

KEY RATING DRIVERS
The 'AAA' 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) of 87% used in the asset coverage test, which is 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.

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 1.2% due to the excess spread available under the programme based on a stressed weighted-average (WA) life of the assets versus the liabilities. 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 47% are interest-only loans. 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' 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.