RPT-Fitch assigns NIBC Bank N.V.'s covered bonds 'AAA(EXP)' expected ratings
(Repeat for additional subscribers)
Sept 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned NIBC Bank N.V.'s (NIBC; BBB-/Stable/F3) conditional pass-through covered bonds an expected 'AAA(EXP)' rating with a Stable Outlook. The expected rating is based on a hypothetical benchmark issuance of EUR500m with a five-year maturity.
KEY RATING DRIVERS
The expected rating is driven by NIBC's Long-Term Issuer Default Rating (IDR) of 'BBB-', a Discontinuity Cap (D-Cap) of 8 (minimal discontinuity) and the asset percentage (AP) of 90% that NIBC will commit to through its investor report, equal to the breakeven AP for a 'AAA' rating and factoring in a two-notch uplift for recoveries given default.
The D-Cap of 8 is driven by the minimal discontinuity assessment of the liquidity gap and systemic risk component. This is due to the pass-through structure and the three-month interest reserve including senior costs in place for the bonds. It also reflects the possibility for alternative management of the cover pool and the appointment of a back-up administrator after a default of NIBC, and the absence of swaps thereby excluding swap counterparty risk.
In addition, the programme is registered with the De Nederlandsche Bank following the issuance of a EUR1m private placement last week. This has the additional benefit of regular oversight and regular assessment of the issuer's programme. The agency believes that none of the other D-Cap components compromise the overall minimal discontinuity assessment for the programme. The breakeven AP level of 90% supports a 'AA' rating on a PD basis and allows for a two-notch recovery uplift for the covered bonds in a 'AAA' scenario. The AP is mainly driven by; (i) a hypothetical issuance of a EUR500m bond with a five-year term in anticipation of the first public issuance from the programme; (ii) the 'AAA' expected loss for the cover pool which is 3.1%; (iii) the margin modelled for the cover pool; and (iv) the insurance set-off risk.
All assets in the cover pool and the covered bonds are euro-denominated. The bond yields fixed rate while the cover assets yield both floating and fixed rates. The programme is exposed to interest rate risk on the fixed rate loans when they revert in a downward interest rate environment to another fixed or to a floating rate at their reset date, as the borrower has the right to switch from one interest type to another at the reset date. Fitch does not give credit to NIBC's minimum mortgage rate commitment of 3.0% for the programme and modelled the loans to revert to a lower fixed rate or to a floating rate at an assumed margin above three-month EURIBOR. The bonds are conditional pass-through with an extended due for payment date 32 years after the bonds expected maturity date.
As of end-July 2013, the cover pool consisted of 8,094 of residential mortgage loan parts totalling EUR610m secured on residential properties in the Netherlands. The weighted average (WA) indexed current loan-to-value is 73.7% and the WA seasoning is 111 months. In total, 69% of the pool is interest-only, the remaining 31% are either life, universal life, investment, annuity, linear, savings or unit-linked mortgage products. All assets in the pool are secured by owner-occupied properties with only 0.3% of the cover pool in arrears. The cover assets have a broad geographic spread across the Netherlands with the main concentrations in Noord-Holland (18.7%), Zuid-Holland (17.4%), and Noord-Brabant (16.6%).
The rating would be vulnerable to downgrade if any of the following occurred: (i) NIBC's IDR was downgraded by two notches to 'BB'; or (ii) the D-Cap was no longer minimal discontinuity and was classified as 6 (very low risk) or worse; or (iii) the AP that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 90%.
The cover pool is of better quality than the total mortgage book. As the pool is dynamic any deterioration of the pool's credit quality over time resulting from adding additional mortgage loans or after unfavourable substitution of the assets will negatively affect the 'AAA(EXP)' breakeven AP. The Fitch breakeven AP for the covered bond's 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.
The Outlook on the covered bond's rating is Stable, which reflects the Stable Outlook on NIBC's IDR and the Dutch mortgage sector (see "2013 Outlook: European Structured Finance" dated 19 December 2012 at www.fitchratings.com). A presale report is available at www.fitchratings.com or by clicking on the link above.
Link to Fitch Ratings' Report: NIBC Bank N.V. - Conditional Pass-Through Mortgage Covered Bond
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