Fitch Affirms Co-operative Bank's Covered Bonds at 'BBB+', Outlook Negative

Fri Mar 28, 2014 2:36pm EDT

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(The following statement was released by the rating agency) LONDON, March 28 (Fitch) Fitch Ratings has affirmed The Co-operative Bank plc's (Co-op, B/Negative/B) GBP600mn outstanding mortgage covered bonds ratings at 'BBB+', Outlook Negative, following a full review of the programme. KEY RATING DRIVERS The rating is based on Co-op's Long-Term IDR of 'B', an unchanged Discontinuity Cap (D-Cap) of '4' (moderate risk), and asset percentage (AP) of 77.5% used in the asset coverage test. This provides cushion compared with the unchanged breakeven AP of 90%. The Negative Outlook on Co-op's IDR drives that of the covered bonds. Any rating action taken on the issuer's IDR will impact the 'BBB+' covered bond rating. The programme is classified as dormant as there has been no further issuance from the programme since November 2011 and Fitch does not expect public issuance in the short- to medium-term. As a result, Fitch only relies on contractual or public AP commitment from the issuer. Fitch observed stable cover pool quality over the past two years and believes it is unlikely the issuer's support to the programme would diminish. As such, the agency has not adjusted the cover-pool-specific component of the D-Cap. At end-January 2014, the cover pool comprised 16,010 prime UK residential loans, totalling GBP1.42bn. Thirty two per cent of the pool is on interest-only basis. Fitch calculated a weighted average (WA) original loan-to-value (LTV) of 64.6% and a WA indexed current LTV of 55.8%. The pool is well-diversified and does not contain any buy-to-let loans. Cover pool credit risk has remained stable. In a 'AAA' scenario, Fitch calculated a WA foreclosure frequency of 20.3% and a WA recovery rate of 63.8%, resulting in a cover pool expected loss of 7.4%. The pool is of sound quality and compares well with UK peers. Loans in arrears are taken out regularly. There is only one 10-year GBP600m fixed-rate soft bullet covered bond outstanding with a 12-month extendable maturity. An external hedging agreement is in place to swap the fixed covered bond payments into floating rate. RATING SENSITIVITIES The 'BBB+' rating would be vulnerable to any of the following: (i) the IDR is downgraded by one notch to 'B-' or more; or (ii) the D-Cap falls by at least one category to '3' (moderate high risk) or lower; or (iii) the AP that Fitch takes into account in its analysis increases above Fitch's 'BBB+' breakeven AP of 90%. 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 issuance. Therefore it cannot be assumed to remain stable Fitch is in the process of implementing its recently updated covered bond criteria to reflect the beneficial position for covered bonds under bank resolution frameworks where covered bonds are exempted from bail-in. The course of implementation will take place as described in Feedback Report: Covered Bond Rating Change - Developments in Bank Resolution Frameworks Beneficial. Contacts: Primary Analyst Kevin Vanistendael Analyst +44 20 3530 1564 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Stephen Kemmy Associate Director +44 20 3530 1474 Committee Chairperson Cosme de Montpellier Senior Director +44 20 3530 1407 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 March 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 13 May 2013, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 13 May 2013, 'EMEA Residential Mortgage Loss Criteria Addendum - United Kingdom', dated 9 August 2012, 'Covered Bonds Rating Criteria - Mortgage Liquidity & Refinancing Stress Addendum', dated 3 June 2013, and 'EMEA RMBS Master Rating Criteria', dated 6 June 2013 are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here EMEA Criteria Addendum - United Kingdom - Mortgage and Cashflow Assumptions here EMEA RMBS Master Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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