TEXT-Fitch affirms Bank of Scotland plc covered bonds at 'AAA'
Aug 1 - Fitch Ratings has affirmed Bank of Scotland plc's (BoS; 'A'/Stable/'F1') mortgage covered bonds at 'AAA'. The total outstanding covered bonds amount to GBP23.2bn. The bonds constitute direct obligations of BoS and are guaranteed by HBOS Covered Bonds LLP. Since January 2010, BoS has been a subsidiary of Lloyds TSB Bank plc, which is part of Lloyds Banking Group plc . The rating of the covered bonds is based on BoS's Long-Term Issuer Default Rating (IDR) of 'A' and a D-Factor of 23.3%, the combination of which enables the mortgage covered bonds to be rated as high as 'AA+' on a probability of default (PD) basis. The rating also reflects the quality of the collateral and the overcollateralisation (OC) between the cover assets and the covered bonds. For issuers rated 'F2' or above, Fitch gives credit to the lowest OC/highest observed nominal AP over the past 12 months, which is 65.4% (including cash). This is sufficient to pass 'AA+' stress scenarios, and provides for high recoveries given default of the covered bonds in a 'AAA' scenario. The D-Factor is mainly driven by the strong asset segregation of the cover pool in a bankruptcy-remote, special purpose entity, the 12-month pre-maturity test triggered at the loss of 'F1+' for hard bullet issuances and a three-month interest reserve that protects against liquidity gaps following issuer insolvency. It also reflects the contractual provisions for the guarantor to take decisions after issuer default, aided by the adequate quality of BoS's IT systems, the UK regulated covered bond framework and swap counterparty arrangements. The AP supporting the 'AAA' rating has been maintained at 70.4% (supporting 'AA+' stresses on a PD basis). This compares to the highest AP observed over the past 12 months, at 65.4% and to the ratio of covered bonds over the cover pool (including cash), which was 58.7% at the end of May and is comfortably below the supporting AP. The level of AP supporting the rating is affected by, among others, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore, it cannot be assumed that the rating will remain stable over time. As of end-May 2012, the cover pool consisted of 366,436 loans secured on residential mortgage loans in the UK, with a total outstanding balance of GBP34.3bn. The mortgage portfolio had a weighted average (WA) original loan-to-value ratio (LTV) of 67.9% (calculated by Fitch) and a WA current LTV of 63.90%. The WA seasoning of the loans was 76 months. The pool does not include any buy-to-let loans. 47.64% of the loans are interest-only. In a 'AAA' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 27.64% and a WA recovery rate of 58.13%. Fitch has modelled the cover pool and covered bonds based on a wind-down situation for the issuer. Due to the shorter WA residual maturity of the covered bonds versus that of the cover pool (4 years versus 13 years), liquidity would have to be raised from the pool in order to pay the covered bonds on a timely basis. All assets in the cover pool are sterling-denominated while the covered bonds are a combination of EUR, GBP, USD and DKK denominated bonds. The bonds yield fixed and floating rates and hedging agreements are in place with BoS to mitigate the interest and currency risks. The cover assets yield both floating and fixed rates and an interest rate swap is in place with BoS to transform the interest collections from the cover assets into one-month GBP LIBOR plus a spread. All else being equal, the covered bonds could remain rated 'AAA' provided BoS's IDR is at least 'A-'. However, on 30 May 2012 Fitch published a report entitled "Exposure Draft: Global Covered Bonds Rating Criteria". The report proposes enhancements to the covered bonds rating criteria in order to increase transparency and reflect Fitch's updated views of systemic risk and cover pool liquidity. Although Fitch anticipates there will be no impact on BoS's covered bond ratings if the exposure draft proposals were implemented as proposed, it would have an impact on the minimum IDR at which the ratings could be maintained at 'AAA' and on the PD rating of the bonds. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Covered Bonds Rating Criteria', dated 30 May 2012, 'Covered Bonds Counterparty Criteria', dated 25 July 2012, 'EMEA Residential Mortgage Loss Criteria Addendum - UK', dated 12 August 2011 and 'EMEA Residential Mortgage Loss Criteria', dated 7 June 2012 are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria Covered Bonds Counterparty Criteria EMEA Residential Mortgage Loss Criteria EMEA Criteria Addendum - United Kingdom - Mortgage Loss and Cash Flow Assumptions
- Malaysia air probe finds scant evidence of attack: sources |
- Search widened as Malaysia air probe finds scant evidence of attack |
- Confrontation in Ukraine as diplomacy stalls |
- Exclusive: Chinese raw materials also found on U.S. B-1 bomber, F-16 jets
- Freescale loss in Malaysia tragedy leads to travel policy questions