TEXT-Fitch Rates Commonwealth Bank of Australia Covered Bonds 'AAA'

Tue Nov 13, 2012 1:24am EST

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(The following was released by the rating agency) SYDNEY, November 13 (Fitch) Fitch Ratings has assigned Commonwealth Bank of Australia's (CBA, 'AA-'/Stable/'F1+') Series 23 EUR113m September 2024 mortgage covered bonds 'AAA' ratings. The Outlook is Stable.

This issue brings CBA's outstanding covered bonds to AUD13.17bn. All bonds are guaranteed by Perpetual Corporate Trust as trustee of the CBA Covered Bond Trust.

The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 2 (high) and an asset percentage (AP) of 85%, which is below Fitch's breakeven AP of 85.25%.

The publicly stated AP of 85% allows the bonds to attain a 'AA+' rating on a probability of default basis and supports a one-notch recovery uplift to 'AAA', based on modelled recoveries.

The 'AAA' rating would be vulnerable to a downgrade if any (i) the issuer's Long-Term Issuer Default Rating (IDR) is downgraded by two or more notches; (ii) the D-Cap falls by more than one category; (iii) the AP level Fitch takes into account in its analysis goes above the breakeven point of 85.25%. Commonwealth Bank of Australia Long-Term Issuer Default Rating: 'AA-', Outlook Stable Mortgage covered bond rating: 'AAA', Outlook Stable D-Cap: 2 (high)

Asset segregation: very low Liquidity gap and systemic risk: high Cover pool-specific alternative management: low Systemic alternative management: moderate Privileged derivatives: moderate The driver of the D-Cap is the high risk assessment for liquidity gap and systemic risk.

This is principally driven by programme documentation which provides, in certain circumstances, for a six-month period prior to a scheduled covered bond maturity for cover pool asset sales, while Fitch has assessed the time required to sell cover pool assets in Australia as 12 months. The D-Cap of 2, when combined with CBA's IDR and recovery uplift, supports a 'AAA' rating on the covered bonds.

As of 31 August 2012, the cover pool consisted of 80,090 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD19.3bn.

The portfolio is wholly made up of full documentation loans which have a weighted average current loan-to-value ratio of 60.1%, and a weighted average seasoning of 37.7 months. Floating-rate loans comprise 87.4% of the cover pool.

In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 10%, and a weighted average recovery rate of 60.9%. The cover pool is geographically distributed across Australia's states, with the largest concentrations being in New South Wales (38%) and Victoria (36%).

The agency's mortgage default analysis is based on its Australian residential mortgage criteria. The Fitch breakeven AP in line with 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 to remain stable over time.

Contacts: Primary Analyst David Carroll Director +61 2 8256 0333 Fitch Australia Pty Ltd. Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst James Leung Associate Director +61 2 8256 0322 Committee Chairperson Natasha Vojvodic Senior Director +61 2 8256 0350 Media Relations: Iselle Gonzalez, Sydney, Tel: +612 8256 0326, Email: iselle.gonzalez@fitchratings.com.

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