TEXT-S&P affirms Northern Rock covered bond programme ratings

Thu Dec 6, 2012 12:49pm EST

OVERVIEW
     -- Following our CreditWatch Negative placement of our rating on the 
Northern Rock (Asset Management) PLC  Global Covered Bond Programme on
July 12, 2012, we have today affirmed and removed from CreditWatch negative our
'AAA' ratings on the program and related series. The outlook is stable.
     -- The covered bond rating process that we have employed follows the 
methodology and assumptions outlined in our covered bond ratings framework 
criteria.
    
     Dec 6 - Standard & Poor's Ratings Services today affirmed and removed from
CreditWatch negative its 'AAA' credit ratings on the Northern Rock (Asset
Management) PLC Global Covered Bond Programme and all issuances of covered bonds
issued under the program. The outlook is stable (see list below). 

Following the publication of our counterparty risk framework criteria, 
originally published on May 31, 2012, since republished on Nov. 29, 2012 (see 
"Counterparty Risk Framework Methodology And Assumptions"), and the "Covered 
Bonds Counterparty And Supporting Obligations Methodology And Assumptions," 
published on May 31, 2012, we placed our rating on the program on CreditWatch 
negative on July 12, 2012, as the program was affected by these criteria and 
we had not received any action plan from the issuer.

INTEREST RATE SWAP

To hedge against the variances between the interest received on the assets in 
the cover pool and the interest payable on the covered bonds, the issuer has 
entered into an interest rate swap with Northern Rock (Asset Management) 
(NRAM) as swap counterparty. The replacement framework for this swap is not 
consistent with our 2012 counterparty criteria general framework. The issuer 
has confirmed to us that it does not intend to update the replacement 
frameworks under the current swap documentation. Therefore, we have modeled 
the cash flows assuming that the interest rate swap is not in place. In 
modeling the interest rate mismatches, we have considered the asset profile of 
the cover pool (which has variable paying assets indexed on NRAM's standard 
variable rate or the Bank of England base rate as well as fixed-rate 
paying assets) and applied haircuts to account for basis risk.

COVERED BOND SWAPS

The LLP has entered into covered bond swaps to hedge currency mismatches 
between the amounts received by the LLP and the amounts payable by the LLP 
under the covered bond guarantee. 

All covered bond swaps are provided by counterparties unrelated to the issuer. 
Therefore, we have assessed counterparty exposure to these external 
counterparties in accordance with our 2012 covered bond counterparty criteria. 
As per table 1 of this criteria, we apply a three-step process for determining 
the maximum potential covered bond rating. 

     -- Step 1: We classify the covered bond program based on single unrelated 
counterparty concentration. We classify the program in bucket 2 because one of 
the unrelated counterparties has a concentration greater than 25%.

Counterparty      Swap       Counterparty      Exposure
                  notional   rating              

Barclays 
Bank PLC       338,250,000   A+/Negative/A-1   5.93%
Natixis S.A.   683,000,000   A/Negative/A-1    11.97%
HSBC Bank 
PLC            341,800,000   AA-/Negative/A-1+ 5.99%
RBS PLC       1,624,669,484  A/Stable/A-1     28.48%
Citibank 
N.A.          691,419,484    A/Negative/A-1   12.12%
UBS AG        972,168,720    A/Stable/A-1     17.04%
Deutsche
Bank AG      1,053,668,720   A+/Negative/A-1  18.47%
CB 
Outstanding  5,704,976,408 
RBS PLC--The Royal Bank of Scotland PLC. 
CB--Covered bonds.

     -- Step 2: We calculate the applicable issuer credit rating (ICR) on the 
derivative counterparties. For programs in bucket 2, the applicable ICR is the 
lowest rated counterparty. The lowest rated counterparties are rated 'A' 
(Natixis S.A., The Royal Bank of Scotland PLC, Citibank N.A., and UBS AG). 
NRAM's ICR is also 'A'.
     -- Step 3: Based on the combination of the ICR on the lowest rated 
counterparty and the ICR on the issuer, we deduct one notch from the maximum 
potential rating uplift from the ICR on the issuer achieved under our 2009 
asset-liability mismatch (ALMM) criteria (see "Revised Methodology And 
Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds," 
published on Dec. 16, 2009). 

THE COVERED BOND RATING

We have applied our five-step approach for rating covered bonds. We have 
reviewed projected cash flow information as of Nov. 1, 2012.

Standard & Poor's Covered Bond Rating Process
Classification of ALMM 0% = Low
Program categorization: Category 2
Maximum potential rating uplift: 6 notches
Deduction for counterparty risk : 1 notch
Maximum potential rating uplift
after counterparty risk: 5 notches 
Distance between ICR and maximum potential rating: 5 notches
Target credit enhancement (%): 42
Available credit enhancement (%): 103
Rating: AAA
Outlook: Stable
ICR--Issuer credit rating. 
 Based on ALMM criteria.
 Including counterparty risk.

Based on the five-step process above, the level of target credit enhancement 
remains below the available credit enhancement allowing us to assign maximum 
achievable ratings of 'AAA' to the covered bonds. We have therefore affirmed 
and removed from CreditWatch negative our 'AAA' ratings on NRAM's covered bond 
program and related series.

The stable outlook on the program is supported by:
     -- The sizable cushion of available credit enhancement above the target 
credit enhancement;
     -- The issuer's ability to maintain the current ratings on the covered 
bonds;
     -- The expectation that the ALMM will remain low over the next 12 months; 
     -- The fact that it would take a two-notch downgrade on any of the lowest 
rated covered bond swap counterparties to result in a one notch deduction on 
the transaction; and 
     -- The stable outlook on the issuer, Northern Rock (Asset Management) PLC.


RELATED CRITERIA AND RESEARCH

     -- Counterparty Risk Framework Methodology and Assumptions, Nov. 29, 
2012* 
     -- U.K. Prime RMBS Index Report Q3 2012: Ratings Likely To Remain Stable, 
Despite Performance Deterioration, Nov. 20, 2012
     -- Covered Bonds Rating Framework: Methodology and Assumptions, June 26, 
2012 
     -- General Criteria: Global Investment Criteria For Temporary Investments 
In Transaction Accounts, May 31, 2012
     -- Covered Bonds Counterparty And Supporting Obligations Methodology And 
Assumptions, May 31, 2012
     -- U.K. RMBS Methodology And Assumptions, Dec. 9, 2011
     -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology 
And Assumptions, June 14, 2011
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- Revised Methodology And Assumptions For Assessing Asset-Liability 
Mismatch Risk In Covered Bonds, Dec. 16, 2009
     -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 
2008

*Criteria fully supersedes "Counterparty Risk Framework Methodology and 
Assumptions," published on May 31, 2012.

RATINGS LIST

Rating Program/      To                From
Country: Covered bond type

Ratings Affirmed And Removed From CreditWatch Negative

Northern Rock (Asset Management) PLC Covered Bond Programme

                     AAA/Stable        AAA/Watch Neg
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