TEXT-Fitch affirms Westpac's covered bonds at 'AAA'; outlook stable

Fri Nov 23, 2012 2:15am EST

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(The following statement was released by the rating agency)

Nov 23 - Fitch Ratings has affirmed Westpac Banking Corporation's (WBC, 'AA-'/Stable/'F1+') residential mortgage covered bonds at 'AAA' with a Stable Outlook.

The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 2 (high) and an asset percentage (AP) of 86.8%, which is equivalent to Fitch's breakeven AP of 86.8% for a 'AAA' rating.

In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be vulnerable to downgrade if the IDR is downgraded by two or more notches; the Discontinuity-Cap (D-Cap) falls by more than one category; or the programme's AP rises above 86.8%.

Westpac Banking Corporation

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 the 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 system-based alternative management and privileged derivatives components are assessed as moderate from a discontinuity point of view. Cover-pool specific alternative management is assessed as low and asset segregation as very low risk in terms of discontinuity, in line with all Australian programmes. The D-Cap of 2, when combined with the institution's IDR and potential recovery uplift, supports a 'AAA' rating on the covered bonds.

As of 31 October 2012, the cover pool consisted of approximately 54,000 loans secured by first ranking mortgages of Australian residential properties with a total outstanding balance of AUD13.5bn. The portfolio is wholly made up of full documentation loans which have a weighted average current loan-to-value ratio of 61.6%, and a weighted average seasoning of 45.9 months. Floating-rate loans represent 85.0% of the cover pool.

In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 9.4%, and a weighted average recovery rate of 55.5%. The cover pool is geographically distributed across Australia's states, with the largest concentrations being in New South Wales (44.4%) and Victoria (30.0%). The agency's mortgage default analysis is based on its Australian residential mortgage criteria.

The outstanding covered bonds, totalling AUD10.4bn, are guaranteed by BNY Trust Company of Australia Limited as trustee of the Westpac Covered Bond Trust.

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 issuance. Therefore it cannot be assumed to remain stable over time.

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