TEXT-Fitch upgrades Unnim Banc mortgage covered bonds to 'A'
Oct 5 - Fitch Ratings has upgraded Unnim Banc S.A.'s (Unnim Banc, 'BBB+'/Negative/'F2') mortgage covered bonds (Cedulas Hipotecarias or CH) to 'A' with a Negative Outlook from 'BBB+' and removed them from Rating Watch Positive (RWP). The rating actions follow the finalisation of the annual review and the resolution of the RWP which was placed on the CH on 18 September 2012 (see "Fitch Revises Rating Watch on Unnim's CH to Positive" at www.fitchratings.com). The CH rating is mainly based on Unnim's Long-term Issuer Default Rating (IDR) of 'BBB+', the Discontinuity Cap (D-Cap) assessment of 0 (full discontinuity risk) and the overcollateralisation (OC) ratio of 83% that Fitch takes into account within its analysis. The 'A' rating on Unnim?s CHs would be vulnerable to a downgrade if the issuer's IDR was downgraded, or the programme OC drops below Fitch's estimated breakeven OC ratio of 72% in a 'A' stress environment. The Negative Outlook on Unnim's IDR drives the Negative Outlook on the CH. As of July 2012, Unnim Banc's total CH amounted to EUR6.7bn and were secured over the bank's total mortgage cover pool of EUR12.9bn, resulting in a total OC of 92%. Unnim Banc publicly states its best efforts to maintain an OC of at least 90%. However, Fitch judges this not to be a contractual obligation, and consequently applies a 10% OC haircut on the lowest OC observed of the last 12 months (92%) to derive a total OC credited level of 83% within its analysis. This 10% haircut is introduced in line with the agency's covered bond criteria for 'F2' rated issuers in the absence of contractual minimum levels of OCs. Fitch assigned a D-Cap of 0 to Unnim's covered bonds, which implies full discontinuity upon the issuer default. This continuity risk analysis is driven by the liquidity gap and systemic risk assessment for Spanish covered bonds issued by banks rated above the sovereign ('BBB'/Negative/'F2'). In Fitch's opinion, there is a lack of specific protection against liquidity shortfalls post assumed issuer insolvency and only intervention by the Spanish authorities would avoid a default on the covered bonds in this scenario (see "Fitch Assigns Spanish Mortgage Covered Bond Programmes Outlooks and D-Caps" dated 11 September 2012 at www.fitchratings.com). Fitch considers Unnim's CH to be materially exposed to interest rate and maturity mismatches, as most of the cover assets are linked to floating rates (81% of the cover pool) and have a weighted-average (WA) residual life of 13.1 years, which compares to most CH being linked to fixed rates and a shorter WA residual life of 5.5 years. In terms of portfolio loss analysis, and based on the cover pool composition and historical performance data analysed, Fitch estimates a total cover pool WA default rate of 43.5%, a WA recovery rate of 33.4% and a WA loss rate of 29% in a 'A' stress environment. The Fitch estimated breakeven OC 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 issuances. Therefore it cannot be assumed to remain stable. Additional information is available on 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 10 September 2012, 'Covered Bonds Counterparty Criteria', dated 13 March 2012, 'EMEA Residential Mortgage Loss Criteria' dated 7 June 2012, 'EMEA Criteria Addendum - Spain - Mortgage Loss and Cash Flow Assumptions', dated 24 July 2012, 'Criteria for Rating Granular Corporate Balance- Sheet Securitisations (SME CLOs)', dated 1 June 2012 are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria - Amended Covered Bonds Counterparty Criteria EMEA Residential Mortgage Loss Criteria EMEA Criteria Addendum - Spain - Mortgage and Cashflow Assumptions Criteria for Rating Granular Corporate Balance-Sheet Securitisations - SME CLO