TEXT-Fitch affirms ING's covered bonds at 'AAA'
Jan 9 - Fitch Ratings has affirmed ING Bank N.V.'s (ING, 'A+'/Stable/'F1+') mortgage covered bonds at 'AAA' with a Stable Outlook, following a full review of the programme. The outstanding EUR28.7bn hard-bullet covered bonds are guaranteed by ING Covered Bond Company B.V. (the CBC), a special purpose company established under Dutch Law. Under the covered bonds rating criteria, a Discontinuity Cap (D-Cap) of 4 applies to the programme. Combined with ING's Long-term Issuer Default Rating (IDR) of 'A+', this allows for a maximum achievable rating of 'AAA' for the covered bonds. The 'AAA' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by three notches or more to 'BBB+'; or (ii) the D-Cap fell by at least three categories to 1 (very high risk); or (iii) the AP that the agency takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 81%. The covered bonds have a Stable Outlook, because the Outlooks on both the issuer and the sovereign are Stable. The agency takes into account the highest observed AP of the past 12 months (63.8%) in its analysis, as the issuer's Short-term IDR is above 'F3'. This allows the covered bonds to be rated 'AAA' on a probability of default (PD) basis. The 'AAA' breakeven AP of 81.0% supports a 'AA' rating on a PD basis and a 'AAA' rating considering recoveries given default. The D-Cap of 4 is driven by the moderate risk assessment of asset segregation, liquidity gap & systemic risk and the privileged derivatives components, which are the weakest of the D-Cap components. The systemic and the cover pool specific alternative management components were assessed at low risk from a discontinuity point of view and have not changed since the previous D-Cap analysis (see "Fitch Puts 2 Dutch Covered Bonds on RWN; Assigns Dutch & Irish Programmes D-Caps & Outlooks" dated 12 September 2012 at www.fitchratings.com). Fitch now communicates the maximum level of AP that supports the assigned covered bond rating. The current 'AAA' breakeven AP is lower than the previous supporting AP of 82.1%. The decrease is mainly driven by a slight deterioration of the asset quality. Since the last analysis, mortgages with higher original loan-to-value ratios (LTV) have been added to the pool. The results also reflect falling house prices in the Netherlands, lower prepayment rate assumptions for Dutch mortgages and Fitch's higher refinancing cost assumptions for the Netherlands. At end-November 2012, the cover pool consisted of EUR42.0bn of residential mortgage loans. The pool consisted of 446,578 loan parts to 243,370 borrowers, secured on residential properties in the Netherlands with 65.3% on pure interest-only repayments. The mortgage portfolio had a WA current indexed LTV of 78.6%. The cover pool assets are diversified over the Netherlands, with the highest concentrations in Zuid-Holland 21.5%, Noord-Holland 21.0% and Noord-Brabant 12.9%. In a 'AAA' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 14.8% and a WA recovery rate of 51.2%. The WA life of the cover assets is 22.0 years, as compared with 7.2 years for the covered bonds. Fitch modelled the mismatches between the cover pool and the covered bonds post a theoretical default of the issuer and assumed that cover pool assets could be sold at a stressed price in order to pay the covered bonds in a timely fashion. Interest received from the cover assets are swapped into floating-rate interest through a total return swap agreement entered into with ING Bank N.V. The CBC has also entered into covered bond swap agreements to hedge interest rate and currency risk. 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 Sept 2012, 'Covered Bonds Counterparty Criteria', dated 25 July 2012, 'EMEA Residential Mortgage Loss Criteria', dated 7 June 2012, 'EMEA RMBS Criteria Addendum - Netherlands', dated 14 June 2012 and 'Covered Bond Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum', dated 14 November 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 - Netherlands - Mortgage Loss and Cash Flow Assumptions - Amended Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum