TEXT-Fitch affirms Yorkshire Building Society mortgage covered bonds at 'AA+'
Jan 25 - Fitch Ratings has affirmed Yorkshire Building Society's (YBS, 'BBB+'/Stable/'F2') GBP1.75bn equivalent regulated mortgage covered bonds at 'AA+' with a Stable Outlook. Under Fitch's covered bond rating criteria, a Discontinuity Cap (D-Cap) of 4 applies to the programme. When combined with YBS'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 downgrade if any of the following occurred: (i) the IDR was downgraded by one-notch to 'BBB'; 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 85.0%. The Outlook on the covered bonds' rating is Stable, which reflects the Stable Outlook on YBS's IDR. The agency takes into account the highest observed nominal AP of the past 12 months (60.4%) in its analysis, as the issuer's Short-term IDR is above 'F3'. This provides ample cushion, compared with the breakeven AP of 85.0% for the 'AA+' rating. The D-Cap of 4 is driven by the moderate risk assessment of the liquidity gap & systemic risk, systemic alternative management and privileged derivatives which are the weakest of the D-Cap components. The asset segregation has been assessed as very low and the cover pool-specific alternative management was assessed at low risk from a discontinuity point of view. The liquidity gap assessment reflects the agency's view of the mitigants in the form of a three-month interest reserve fund and a 12-month extendible maturity on the covered bonds. The systemic alternative management score reflects the positive effect of the active oversight taken by the FSA under the UK regulated covered bonds framework. Finally, the privileged derivatives assessment is due to internal interest rate swaps being in place that are considered highly material for the programme The Fitch 'AA+' breakeven AP level of 85.0% supports a 'AA-' rating on a PD basis and allows for a two-notch recovery uplift for the covered bonds in a 'AA+' scenario. It is lower than the previous breakeven AP of 86.5%. The 'AA+' breakeven AP deteriorated due to (i) the change in the pool composition since the last review; and (ii) the impact of the poorer repossession data provided by YBS on the total mortgage book, which was lower than Fitch's criteria assumptions. An asset coverage test (ACT) is calculated monthly to ensure that a minimum level of credit enhancement is maintained at any time. In addition to the AP that applies to the nominal value of the assets, a negative carry factor is used in the ACT to calculate an additional amount of collateral to compensate for the risk of the limited liability partnership having to hold funds yielding less than the interest on the covered bonds. The amount is the product of the weighted average (WA) remaining maturity of the outstanding series of covered bonds (3.9 years), the GBP equivalent of the aggregate amount of outstanding covered bonds (GBP1.7bn) and the negative carry factor (2.02%, a function of the WA margin on the covered bond swaps). The higher the WA margin on the covered bonds swaps, the higher amount of additional collateral is needed. Interest rate mismatches are hedged. The cover assets yield both floating and fixed rates and a swap is in place with YBS to transform the interest collections from the cover assets into three-month GBP LIBOR plus a spread. The bonds yield both fixed and floating rates and are denominated in euro and sterling. Both interest and currency rate risks are hedged with HSBC Bank plc ('AA-'/Stable/'F1+'). Maturity mismatches are significant, with the weighted-average life of the assets at 11 years and of the liabilities at 3.9 years. At end-November 2012, the cover pool consisted of GBP3.5bn of residential mortgages. The pool consisted of 34,992 loans secured on residential properties in the UK with 12.6% on interest-only repayments and 58.1% fixed rate loans. Furthermore, there are no buy-to-let loans and all borrower income has been verified. The mortgage portfolio had a WA current indexed loan to value ratio of 61.6% and seasoning of 66 months. The cover pool assets are reasonably diversified over the UK, with the exception of Yorkshire & Humberside (19.7%). Fitch accounted for this potential concentration risk in its analysis by increasing the probability of default for these loans. In a 'AA+' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 17.4% and a WA recovery rate of 59.9%. 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, 'Covered Bond Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum' dated 14 November 2012, 'EMEA Residential Mortgage Loss Criteria', dated 7 June 2012 and 'EMEA Residential Mortgage Loss Criteria Addendum - United Kingdom', dated 09 August 2012, are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum EMEA Residential Mortgage Loss Criteria EMEA Criteria Addendum - United Kingdom - Mortgage and Cashflow Assumptions Covered Bonds Rating Criteria - Amended Covered Bonds Counterparty Criteria