Fitch Affirms ANZ's Mortgage Covered Bonds at 'AAA'; Outlook Stable.
KEY RATING DRIVERS
The rating is based on ANZ's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift (PCU) of three notches and the asset percentage (AP) of 90.5% used in the programme's asset coverage test, which Fitch relies upon in its analysis. This AP supports a 'AA+' tested rating on a probability-of-default basis and a 'AAA' rating after giving credit for recoveries from the cover assets given default of the covered bonds. The Stable Outlook reflects the one-notch buffer against downgrade of ANZ's IDR.
Fitch has updated the 'AAA' breakeven AP to 91% from 90.5% following a review of liquidity protection for the hard and soft bullet bonds in the programme. Fitch gives greater credit to the availability of a cash reserve upon a potential breach of the prematurity test for the hard bullet bonds. For the programme to deteriorate from its current position we would need to see a decline in the asset margin against the bank bill swap rate to below the 2% modelled, which we now view as unlikely given that the bank operates with much higher margins than this level.
The 'AAA' breakeven AP corresponds to a breakeven overcollateralisation of 9.9%, driven by the asset-disposal loss component of 12.7%. This reflects the significant maturity mismatches modelled in the programme, with the weighted-average residual life of the assets at 15.6 years and the liabilities at 4.9 years (as of November 2017). The credit loss component is unchanged and contributes 3.6%. The cash-flow valuation component decreases the breakeven over-collateralisation by 6.1% due to the available excess spread modelled by Fitch in the programme.
The IDR uplift is zero notches as Australia does not have a specific advanced bank-resolution regime and covered bonds are not explicitly exempt from bail-in.
The PCU is three notches and is driven by the cure period of up to six months under the 12-month prematurity test for the outstanding hard-bullet bonds. This constitutes a weaker provision than the 12-month extension for the outstanding soft bullet covered bonds. It is therefore reflected in Fitch's assessment of the programme. Fitch's PCU also takes into account the three-month interest protection in the form of a reserve that will be funded upon the loss of ANZ's Short-Term IDR rating of 'F1+'.
The recovery uplift on the rating is capped at one notch, as the programme is significantly exposed to foreign-exchange risk from recoveries given default of the covered bonds. This is because the assets are denominated in Australian dollars, while 95.0% of the covered bonds outstanding are denominated in other currencies. Swaps are in place on the liabilities, but we expect those swaps to terminate in a recovery scenario.
ANZ's covered bonds would be vulnerable to a downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 91% or if the bank's Long-Term Issuer Default Rating (IDR) falls below 'A+'. If the nominal AP in the programme rises to the maximum 95.0% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA', one notch above the IDR.
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, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time.
Previous analysis of the programme did not model the asset default timing in accordance with Fitch's APAC Residential Mortgage Rating Criteria. Fitch determined that the small amount of discrepancy in breakeven overcollateralisation for the rating (<10bp) arising from the error was within the tolerance level for the assigned rating. Fitch's cash flow modelling of the asset default timing affects the documented pro-rata stressed sale amount simulated by the agency for a given issuer default scenario, which limits the amount of assets that can be sold.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Feb 6, 2018|
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