TEXT: Fitch Rates NAB's Covered Bond Series 2 'AAA'

(The following was released by the rating agency)

SYDNEY, January 16 (Fitch) Fitch Ratings has assigned National Australia Bank Limited's (NAB, 'AA'/Stable/'F1+') EUR1bn Series 2 five-year mortgage covered bonds a 'AAA' rating. The hard bullet bonds are due in January 2017. The bonds are guaranteed by Perpetual Corporate Trust as trustee of the NAB Covered Bond Trust. Under this programme NAB can periodically issue covered bonds up to USD20bn secured on a dynamic pool of first-ranking Australian residential mortgage loans.

The rating is based on NAB's Long-Term Issuer Default Rating of 'AA' and a Discontinuity Factor (D-Factor) of 24.9%, the combination of which enables the covered bonds to reach a 'AAA' rating on a probability of default basis (PD). The programme's contractual asset percentage (AP) of 82.3%, equivalent to a minimum overcollateralisation of 21.5%, is equal to the AP supporting the 'AAA' rating. The level of AP supporting the rating will be affected, among other things, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance and it cannot be assumed that it will remain stable over time.

The D-Factor of 24.9% reflects the strength of the asset segregation through a bankruptcy remote SPV, which acts as guarantor of the covered bonds. It also reflects the mitigant to liquidity gap risk in the form of a pre-maturity test, triggering the cash collateralisation of payments due over the next 12 months upon a downgrade of the issuer below 'F1+', or for future soft bullet issues, a 12-month maturity extension and a cash reserve covering three months of payments due on the covered bonds. It further takes into account the provision for the guarantor to take decisions after issuer default, aided by the adequate quality of the issuer's IT systems; and the oversight of the issuer under covered bond legislation recently enacted in Australia. All else being equal, the rating of NAB's mortgage covered bonds could still be maintained at 'AAA' if the issuer is rated at least 'A-'.

As of 28 December 2011, the cover pool consisted of 11,480 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD3,301m. The portfolio is wholly made up of full documentation loans which have a weighted average current loan-to-value ratio of 61.3%, and a weighted average seasoning of 19 months. Floating-rate loans comprise 92.5% of the cover pool. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 8.5%, and a weighted average recovery rate of 61.1%. The cover pool is geographically distributed across Australian states, with the largest concentrations being in New South Wales (41.7%) and Victoria (36.5%). The agency's mortgage default analysis is based on its Australian residential mortgage criteria.

Fitch has formed assumptions about the default probability and losses of the cover pools under a 'AAA' stress scenario, and tested maturity mismatches between the cover pools and possible covered bond issuance in a wind-down scenario under the management of a third party.