Fitch Rates ASB's Series 2016-1 EUR500m Covered Bonds 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned ASB Bank Limited's (ASB, AA-/Stable/F1+) Series 2016-1 EUR500m mortgage covered bonds a rating of 'AAA'. The Outlook is Stable.
The fixed-rate bond is due in April 2021, and benefits from a 12-month extendable maturity. Series 2016-1 is issued by ASB Finance Limited (ASBFL), which is a special purpose vehicle guaranteed by ASB for offshore issuance from its London branch.
This issuance brings the total outstanding covered bond issuance to NZD3.2bn, of which NZD2.7bn is issued by ASBFL and NZD500m is issued by ASB. These covered bonds are guaranteed by ASB 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: ASB's Long-Term Issuer Default Rating (IDR) of 'AA-'; a Discontinuity Cap (D-Cap) of 2 notches; and the AP that Fitch relies in its analysis being the highest nominal asset percentage (AP) in the last 12 months (71.7%). The AP provides a large buffer when compared to Fitch's breakeven AP for a 'AAA' rating of 86%. This supports a 'AA' tested rating 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 ASB's IDR.
The 'AAA' breakeven AP of 86%, corresponding to a breakeven overcollateralisation (OC) of 16.3%, is driven by the asset disposal loss component of 20.6%, which reflects the maturity mismatches in the programme - with the weighted-average (WA) residual life of the assets at 12.9 years, and the liabilities at 2.8 years - and the refinancing assumptions applied to New Zealand residential mortgages. This is followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 6.1%, which reflects the longer WA stressed life of the assets versus the outstanding liabilities and the excess spread available under the programme.
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) ASB's IDR was downgraded by two notches to 'A'; (ii) the D-Cap fell by two categories to 0 (full discontinuity); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 86%.
Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, amongst 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.