TEXT: Fitch Rates Westpac Banking Group Covered Bonds 'AAA'

(The following was released by the rating agency)

SYDNEY, February 07 (Fitch) Fitch Ratings has assigned Westpac Banking Corporation's (WBC, 'AA'/RWN/'F1+') Series 2012-(C3 & C4) AUD3.1bn residential mortgage covered bonds a 'AAA' rating. The hard bullet bonds due in February 2017 are guaranteed by BNY Trust Company of Australia Limited as trustee of the Westpac Covered Bond Trust. Under this programme WBC 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 WBC's Long-Term Issuer Default Rating (IDR) of 'AA' and a Discontinuity Factor (D-Factor) of 30.1%, 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 82.9% (equivalent to 20.6% overcollateralisation) 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 issuances and it cannot be assumed that it will remain stable over time. It should be noted that the AP has decreased from 83.7% at the time of inaugural bond issuance rating as a result of higher covered bond swap margins.

Fitch's D-Factors measure the likelihood of an interruption of payments on the covered bonds at the time of a default by their issuer, on a scale between 0%-100%, with 0% reflecting a perfect continuity and 100% equivalent to a simultaneous default of the issuer and its covered bonds.

The D-Factor of 30.1% here reflects the strength of asset segregation through a bankruptcy remote SPV, which will act as guarantor of the covered bonds. It also factors in 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 reflects 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 WBC's residential mortgage covered bonds could still be maintained at 'AAA' if the issuer was rated at least 'A'.

As of 31 December 2011, the cover pool consisted of 28,548 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD7.1bn. The portfolio is wholly made up of full documentation loans which have a weighted average current loan-to-value ratio of 62.3%, and a weighted average seasoning of 3.1 years. Floating-rate loans represent 86.2% of the cover pool. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 8.8%, and a weighted average recovery rate of 57.7%. The cover pool is geographically distributed across most Australian states, with the largest concentrations being in New South Wales (44.5%) and Victoria (30.7%). 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 issuances in a wind-down scenario under the management of a third party.