TEXT-Fitch maintains Co-operative Bank covered bonds at 'AA+'/RWN

Wed Nov 14, 2012 10:12am EST

Nov 14 - Fitch Ratings has maintained The Co-operative Bank plc's 
(Coop, 'BBB+'/Rating Watch Negative/'F2') GBP600m mortgage covered bonds' 'AA+'
rating on Rating Watch Negative (RWN) following a review of the programme.

The rating is based on Coop's Long-term Issuer Default Rating (IDR) of
'BBB+'/RWN, the Discontinuity Cap (D-Cap) of 4 (moderate risk) and the asset
percentage (AP) of 39.2% that Fitch takes into account in its analysis.

The 'AA+' rating would be vulnerable to downgrade if any of the following
occurred: (i) Coop's IDR was downgraded to 'BBB' or lower; or (ii) the D-Cap
fell by at least one category to 3 (moderate high risk) or lower; or (iii) the
AP that Fitch takes into account in its analysis increased above Fitch's 'AA+'
breakeven AP of 89.0%. The RWN on Coop's IDR drives the RWN on the covered
bonds, which will be resolved following the review of the RWN on Coop's IDR (see
'Fitch Downgrades Co-operative Bank to 'BBB+'; Maintains on RWN' dated 19 July
2012 at www.fitchratings.com).

The agency takes into account the highest AP of the last year in its analysis,
reflecting the issuer's 'F2' Short-term IDR. The level of AP Fitch relies upon
supports a 'AA-' rating on a probability of default (PD) basis and a 'AA+'
rating considering recoveries given default.

The D-Cap of 4 is driven by the moderate risk assessment of the liquidity gap
and systemic risk and both the systemic and cover pool specific alternative
management risk components, which are the weakest of the D-Cap components. The
asset segregation and the privileged derivatives are assessed as very low risk
from a discontinuity point of view.

The 12-month extendible maturity on the covered bonds drives the liquidity gap
and systemic risk assessment. The systemic alternative management reflects the
significant role to be performed post issuer default by the administrator of the
limited liability partnership that would need to contract other parties to
perform important functions as a potential negative for the programme, but the
active oversight taken by the FSA under the UK regulated covered bonds framework
is viewed positively. Regarding the cover pool-specific alternative management,
Fitch has a positive view of Coop's processes, data delivery and the internally
developed IT systems, but notes that internally developed IT systems will likely
lead to a more difficult transition to an alternative manager than market-based
systems.

At end-August 2012, the cover pool consisted of GBP1.97bn of mortgage loans
secured on residential properties in the UK. The WA seasoning of the loans in
the pool is 54 months and 21.09% are on interest-only repayments. The pool is
reasonably diversified across the UK and does not contain any buy-to-let loans.
The WA original loan-to-value ratio (LTV) was 66.5% (calculated by Fitch) and
the WA current indexed LTV 61.72%. The pool's credit quality is better than most
peers and Fitch calculated a weighted-average frequency of foreclosure of 17.45%
and weighted-average recovery rate of 65.01% in a 'AA+' scenario.

The Fitch breakeven 'AA+' AP level has increased to 89.0% from 86.5% reflecting
the agency's less conservative stress assumptions on the spread provided by the
SVR loans and a higher WA interest rate of the fixed rate loans (4.8% vs. 4.3%
for the previous analysis). The main contributors to the breakeven AP are the
credit risk of the cover pool and the refinancing stress assumption, due to the
high maturity mismatches between the cover pool and the covered bonds. The
amount of the negative carry factor sized in the asset coverage test provides
additional overcollateralisation, and is higher than most peers, which is
reflected positively in the breakeven AP.

The Fitch breakeven AP for 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 issuances.
Therefore it cannot be assumed to remain stable over time.

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 10 September 2012,
'Covered Bonds Counterparty Criteria', dated 25 July 2012, 'EMEA Residential
Mortgage Loss Criteria Addendum - United Kingdom', dated 9 August 2012 and 'EMEA
RMBS Master Rating Criteria', dated 7 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 - United Kingdom - Mortgage and Cashflow Assumptions
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