TEXT - Fitch affirms Barclays Bank plc 'AAA' covered bonds
Jan 31 - Fitch Ratings has affirmed Barclays Bank plc's (Barclays, 'A'/Stable/'F1') public sector covered bonds at 'AAA', Negative Outlook following the publication of the agency's Asset Analysis Criteria for Covered Bonds of European Public Entities (see 'Fitch: Criteria for the Asset Analysis of European Public Entities' Covered Bonds' dated on 30 January 2013 at www.fitchratings.com). The rating is based on Barclays Long-term Issuer Default Rating (IDR) of 'A', the Discontinuity Cap (D-Cap) of 8 (minimal discontinuity) and the contractual asset percentage (AP) that Fitch takes into account in its analysis, which is currently 88.0%. The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) the UK sovereign rating was downgraded by one or more notches to 'AA+' or lower; or (ii) the D-Cap fell by five or more categories to 3 (moderate high risk) or lower; or (iii) the AP that Fitch considers in its analysis rises above Fitch's 'AAA' breakeven level of 89.0%, previously 91.5%. The Fitch breakeven AP for the covered bond rating will be affected by, amongst other factors, 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. The Negative Outlook reflects that the rating would be affected by a one-notch downgrade of the UK sovereign rating ('AAA'; Negative). The covered bonds rating is linked to the sovereign's, as the overcollateralisation between the cover pool and the covered bonds does not protect investors against the impact a sovereign default would have on the creditworthiness of UK local authorities. The D-Cap of 8 (minimal discontinuity risk) remains unchanged, due to the pass through nature of the programme and the inclusion of a three-month interest reserve, which is reflected in the agency's liquidity gap and systemic risk assessment (see "Fitch Affirms Barclays Public Sector Covered Bonds 'AAA'; Revises Outlook to Negative", dated 14 December 2012 for further information). The agency considers the programme to be in wind down as there has been no further issuance from the programme since its inception in 2009, and no further issuance is expected. This is reflected in the cover pool-specific alternative management section of the programme D-Cap. This is also why Fitch relies on the contractual AP rather than the highest observed AP over the last 12 months to form its opinion. The covered bonds are secured over a cover pool of exposures to public-sector entities in the UK. As of August 2012, the cover pool amounted to GBP3.443bn. It consisted of 371 assets from 146 debtors, with the largest obligor representing 8.2% of the outstanding portfolio, and the 20 largest exposures accounting for 49.0% of the pool. The assets are interest-only loans with varying optional repayment dates. The assets have a WA remaining legal maturity of 53 years but if all debtors exercise their next optional repayment date, the WA life of the assets shortens to two years. In a 'AAA' scenario, Fitch has modelled a cumulative default rate of 28.0% (previously 25.4%) for the cover pool, driven by the credit quality and concentration of the underlying obligors. In addition, Fitch modelled a stressed recovery rate of 58.2% (previously 64.6%) for the defaulted assets. In its analysis, Fitch has considered that the UK would remain solvent and gives credit to the portfolio being regionally diversified and the country's centralised framework. The credit risk of the cover pool is the main driver of the breakeven AP for this programme. The legal final maturity of the covered bonds is November 2081. Both the cover pool and the covered bonds are sterling-denominated. Fitch has compared the cash flows from the cover pool in a wind-down situation, subject to stressed defaults and losses, and under the management of a third party, to the payments due under the covered bonds. Interest rate risks are hedged through a total return asset swap between the LLP acting as guarantor and Barclays (subject to replacement triggers).