RPT-Fitch Affirms HSBC Bank Plc's Mortgage Covered Bonds at 'AAA'; Outlook Stable
Dec 6 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed HSBC Bank plc's (HSBC, AA-/Stable/F1+) covered bonds at 'AAA' with a Stable Outlook.
KEY RATING DRIVERS
The covered bond rating is based on HSBC's Long-term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 4 (moderate risk) and the asset percentage (AP) between the covered bonds and the cover pool. Fitch takes into account the AP used in the asset coverage test (ACT) of 87.0% in its analysis. This is equal to the breakeven AP of 87.0% for the 'AAA' rating. The Stable Outlook on the covered bonds' rating reflects that on HSBC's IDR.
The programme is classified as dormant due to the absence of issuance in the last two years. Given the satisfactory management of the programme and the publicly stated AP in the ACT, no adjustment has been made to the D-Cap.
However, for dormant programmes Fitch does not rely on the highest AP observed in the past 12 months (lowest available OC observed for that period), but only on the issuer's public statement about OC, which in this case is the AP published in the investor report and used in the ACT (87.0%).
The D-Cap of 4 is driven by Fitch's assessment of the liquidity gap & systemic risk, the alternative management (systemic and cover pool specific) and the privileged derivative categories, as moderate risk, all of which are the weakest of the D-Cap components.
The liquidity gap & systemic risk assessment takes into account the liquidity risk mitigants, mainly a three-month reserve fund and the 12-month extendible maturity on the two soft-bullet covered bonds. The hard-bullet bond has a prematurity test in place which comes into effect upon a downgrade of the issuer's 'F1+' rating. The systemic alternative management score reflects the provision for alternative management post insolvency and the challenges faced by the alternative manager, as well as the positive effect of the active oversight taken by the Financial Conduct Authority.
In assessing cover pool-specific alternative management as moderate risk, Fitch has taken a positive view of HSBC's processes and the IT systems. The risk assessment for privileged derivatives is also evaluated as moderate risk, due to internal swaps to hedge FX mismatches between the cover assets and the covered bonds. Asset segregation has been assessed as very low risk from a discontinuity point of view.
Fitch's 'AAA' breakeven AP level of 87.0% supports a 'AA' rating on a probability of default (PD) basis and allows for a two notch recovery uplift for the covered bonds in a 'AAA' scenario. The Fitch 'AAA' breakeven AP for the covered bonds will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time. As of October 2013, the cover pool totalled GBP9.3bn. The pool consisted of 81,285 mortgages secured on residential properties in England and Wales with 14.5% on interest- only repayments. Tracker rate loans represent 75.1%, with the rest being either on a fixed rate or on a standard variable rate. The mortgage portfolio had a weighted average (WA) current indexed loan-to-value ratio of 43.2% and a seasoning of 44 months. The cover pool assets are reasonably diversified over the UK with a concentration in the South East (29.2%) and London (26.6%). In a 'AAA' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 14.8% and a WA recovery rate of 81%. The weighted-average life of the assets is 9.4 years, compared with 1.2 years for the covered bonds.
An ACT is calculated monthly to ensure that a minimum level of credit enhancement is maintained at all 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 WA remaining maturity of the outstanding series of covered bonds (1.2 years), the GBP equivalent of the aggregate amount of outstanding covered bonds (GBP947m) and the negative carry factor (a function of the WA margin on the covered bond swaps). The higher the WA margin on the covered bonds swaps, the higher the amount of additional collateral provided.
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by four notches to 'BBB+'; or (ii) the D-Cap falls by four categories to 0 (full discontinuity); or (iii) the AP that Fitch takes into account in its analysis increases above Fitch's 'AAA' breakeven AP of 87.0%.
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