TEXT-Fitch affirms SNS Bank's covered bonds at 'AA+'
Jan 11 - Fitch Ratings has affirmed SNS Bank N.V.'s (SNS, 'BBB+'/Stable/'F2') mortgage covered bonds at 'AA+' with a Stable Outlook, following a full review of the programme. The outstanding EUR4.3bn soft-bullet covered bonds are guaranteed by SNS 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 this programme. When combined with SNS's Long-term Issuer Default Rating (IDR) of 'BBB+', it allows for a maximum achievable rating of 'AA+' for the covered bonds. The 'AA+' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by one-notch or more; or (ii) the D-Cap fell by one category to 3 (moderate high risk); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis increased above Fitch's 'AA+' breakeven AP of 76.0%. The covered bonds have a Stable Outlook, driven by the Stable Outlooks on both the issuer and the sovereign. The D-Cap of 4 is driven by the moderate risk assessment of asset segregation, liquidity gap & systemic risk and cover pool specific alternative management, which are the weakest of the D-Cap components. The systemic alternative management and the privileged derivatives components were assessed as low risk from a discontinuity point of view (see "Fitch Downgrades SNS's Covered Bonds to 'AA+'; Outlook" dated 12 October 2012 at www.fitchratings.com). The agency takes into account the highest observed AP of the past 12 months (67.4%) in its analysis, as SNS's Short-term IDR is above 'F3'. The 'AA+' breakeven AP of 76.0% supports a 'AA-' rating on a probability of default (PD) basis and a 'AA+' rating considering recoveries given default. The increase in the 'AA+' breakeven AP to 76.0% from 78.0% previously is mainly driven by an increase in the expected loss calculated on the cover pool, which is explained by decreasing house prices in The Netherlands. At end-October 2012, the cover pool contained only residential mortgage loans in The Netherlands of EUR6.3bn, of which 17% benefit from NHG's guarantee. The cover pool is well seasoned (six years) with a weighted average (WA) original loan to value (LTV) of 80% and WA current indexed LTV of 84%. The cover pool contains 87% of interest only, insurance and investment mortgage loans and the remainder 13% are mainly savings loans and amortising mortgage loans. The cover pool assets are diversified over The Netherlands, with the highest concentrations in Limburg (17%), Noord-Brabant (16%) and Gelderland (15%). In a 'AA+' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 14.87% and a WA recovery rate of 60.15%. The cover assets' WA life is 23 years, compared to six 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. The covered bond program benefits from i) the total return swap which is provided by SNS and has a stand-by swap provider and ii) the interest rate swaps provided by eligible third parties. Interest received from the cover assets are swapped into floating-rate interest through a total return swap agreement. The CBC has also entered into covered bond swap agreements to hedge interest rates, where a floating rate is swapped into the fixed rate payments on the covered bonds. 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', 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
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