TEXT - Fitch affirms Barclays Bank plc 'AAA' covered bonds

Thu Jan 31, 2013 11:35am EST

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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).
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