Fitch Affirms UK Covered Bonds on Criteria Amendments

Thu Apr 3, 2014 12:27pm EDT

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(The following statement was released by the rating agency) LONDON/MADRID, April 03 (Fitch) Fitch Ratings has affirmed the ratings of 15 UK covered bonds programmes, comprising 14 on Stable Outlook and one on Negative Outlook. These rating actions follow the implementation of the agency's recently revised Covered Bonds Rating Criteria on programmes issued by UK banks. The rating actions take into account the relevant Negative Outlooks on banks' Issuer Default Ratings (IDR) announced by Fitch on 26 March 2014 (see 'Fitch Revises Outlooks on 18 EU Commercial Banks to Negative on Weakening Support'). As part of its updated covered bonds analysis, the agency has assigned IDR uplift to each programme, where applicable. KEY RATING DRIVERS Abbey National Treasury Services plc (Abbey), Plc's mortgage covered bonds are affirmed at 'AAA'/Stable based on Abbey's IDR of 'A'/Stable. The rating also reflects a newly assigned IDR uplift of '0', an unchanged D-Cap of '4' (moderate discontinuity risk) and the asset percentage (AP) taken into account by the agency, which provides more protection than the breakeven AP for the rating. Bank of Scotland plc (BoS) HBOS mortgage covered bonds are affirmed at 'AAA'/Stable based on BoS's IDR of 'A'/Negative. The rating also reflects a newly assigned IDR uplift of '1', an unchanged D-Cap of '4' (moderate discontinuity risk) and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Since the covered bonds rating can sustain a one-notch downgrade of BoS's IDR to its Viability Rating, the Stable Outlook remains in place for the covered bonds despite BoS's IDR being on Negative Outlook. BoS Intelligent Finance mortgage covered bonds have been affirmed at 'AAA'/Stable based on BoS's IDR of 'A'/Negative, an IDR uplift of '0', an unchanged D-Cap of '8' (minimal discontinuity risk) and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. The bonds are non-regulated and as a result are not compliant with the Undertakings for Collective Investments in Transferrable Securities (UCITS) Directive. Given that these types of bonds are not explicitly exempt from bail-in, no IDR uplift is applicable. Since the covered bonds rating can sustain a one-notch downgrade of BoS's IDR to its Viability Rating, the Stable Outlook remains in place for the covered bonds despite BoS's IDR being on Negative Outlook. Barclays Bank Plc (Barc) mortgage covered bonds are affirmed at 'AAA'/Stable based on Barc's IDR of 'A'/Stable, a newly assigned IDR uplift of '1', an unchanged D-Cap of '3' (moderate high discontinuity risk) and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Bradford & Bingley's mortgage covered bonds have been affirmed at 'AA+'/Stable. The rating is based on the guarantee provided by HM Treasury. Thus, the covered bonds are not affected by the covered bonds criteria amendments and are not eligible for an IDR uplift. Clydesdale Bank plc (CLY) mortgage covered bonds have been affirmed at 'AAA'/Stable based on CLY's IDR of 'A'/Stable - itself based on the creditworthiness of its parent National Australia Bank Ltd (AA-/Stable). The rating also reflects a newly assigned IDR uplift of '0', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Co-operative Bank Plc (Coop) mortgage covered bonds are affirmed at 'BBB+'/Negative based on Coop's IDR of 'B'/Negative, a newly assigned IDR uplift of '0', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Coventry Building Society (CBS) mortgage covered bonds are affirmed at 'AAA'/Stable based on CBS's IDR of 'A'/Stable, a newly assigned IDR uplift of '0', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. HSBC Bank Plc (HSBC) mortgage covered bonds are affirmed at 'AAA'/Stable based on HSBC's IDR of 'AA-'/Stable, a newly assigned IDR uplift of '1', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Leeds Building Society (LBS) mortgage covered bonds are affirmed at 'AAA'/Stable based on LBS's IDR of 'A-'/Stable, a newly assigned IDR uplift of '0', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Lloyds mortgage covered bonds have been affirmed at 'AAA'/Stable based on Lloyds' IDR of 'A'/Negative, a newly assigned IDR uplift of '1', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Since the covered bonds rating can sustain a one-notch downgrade of Lloyds' IDR to its Viability Rating, the Stable Outlook remains in place for the covered bonds despite Lloyds' IDR being on Negative Outlook. Nationwide Building Society (NBS) mortgage covered bonds are affirmed at 'AAA'/Stable based on NBS's IDR of 'A'/Stable, a newly assigned IDR uplift of '0', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Northern Rock Asset Management plc (NRAM) mortgage covered bonds have been affirmed at 'AAA'/Stable as they are not affected by the criteria amendments and the covered bonds are not eligible for an IDR uplift. The rating is based on Fitch's view that it is highly unlikely that NRAM would default on its obligations as the provider of first recourse for the covered bond holders; the involvement of HM Treasury, notably providing a guarantee for all of NRAM's senior unsecured obligations until maturity, including the programme's collection account, GIC account and asset swap; the available OC in the programme; and NRAM's AP commitment in the asset coverage test providing more protection than the breakeven AP for the rating. Royal Bank of Scotland plc (RBS) mortgage covered bonds are affirmed at 'AAA'/Stable based on RBS's IDR of 'A'/Negative, a newly assigned IDR uplift of '2', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. Since the covered bonds rating can sustain a potential two-notch downgrade of RBS's IDR to its Viability Rating, the Stable Outlook remains in place for the covered bonds despite RBS's IDR being on Negative Outlook. Yorkshire Building Society (NBS) mortgage covered bonds are affirmed at 'AA+'/Stable based on NBS's IDR of 'BBB+'/Stable, a newly assigned IDR uplift of '0', an unchanged D-Cap of '4' and the AP taken into account by the agency, which provides more protection than the breakeven AP for the rating. The IDR uplift expresses Fitch's judgement of the degree of protection in the event of a bank's resolution that would be available to prevent the source of covered bonds payments switching from the issuer to the cover pool. It is derived from the following factors: Fitch's opinion of the relative ease and motivations for resolution methods other than liquidation, the importance of covered bonds to the financial markets in a given jurisdiction and the extent of buffer offered by senior unsecured debt. Fitch's view on the use of resolution methods other than liquidation contributes to the IDR uplift assigned to the programmes of Barc, HSBC, RBS where benefit is provided to their Global Systemically Important Bank (G-SIB) status and also the Lloyds and HBOS programme based on Lloyds' large size in the UK market. Once the D-SIB list is published by the regulator, should Santander UK and Nationwide be included in such list, the covered bonds of Abbey and Nationwide could be eligible for the IDR uplift. Protection from the level of senior unsecured debt is reflected in the IDR uplift assigned to the mortgage covered bonds of RBS. This is based on Fitch's estimate of long-term non-retail placed senior unsecured debt at 5% of total adjusted assets, based on the latest available financial information. RATING SENSITIVITIES Abbey National Treasury (Abbey): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB+'; (ii) the D-Cap is lowered to '2' (high risk); (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 91%. Bank of Scotland plc (BoS) - HBOS Programme: The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB'; (ii) the D-Cap is lowered to '1' (very high risk); (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 78%. Bank of Scotland plc (BoS) - Intelligent Finance Programme: The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BB'; (ii) the D-Cap is lowered to '2'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 86.7%. Barclays Bank plc (Barc): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB+'; (ii) the D-Cap is lowered to '1'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 82%. Bradford & Bingley (B&B): The 'AA+' rating of B&B covered bonds is vulnerable to downgrade if the Long-Term IDR of the UK sovereign is downgraded by one or more notches as Fitch gives credit to the guarantee in place by Her Majesty's Treasury. Clydesdale Bank plc (CLY): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB+'; (ii) the D-Cap is lowered to '2'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 81.5%. Co-operative Bank plc (Coop): The 'BBB+' rating of the covered bond is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'B-'; (ii) the D-Cap is lowered to '3'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'BBB+' breakeven AP of 90%. Coventry Building Society (CBS): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB+'; (ii) the D-Cap is lowered to '2'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 85.8%. HSBC Bank plc (HSBC): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB'; (ii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 87%. Leeds Building Society (LBS): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB+'; (ii) the D-Cap is lowered to '3'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 82%. Lloyds Bank plc (Lloyds): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB'; (ii) the D-Cap is lowered to '1'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 85%. Nationwide Building Society (NBS): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB+'; (ii) the D-Cap is lowered to '2'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 90%. Northern Rock Asset Management plc (NRAM): The 'AAA' rating of NRAM covered bonds is vulnerable to downgrade if any of the following occurs: (i) the AP that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 66% or; (ii) the UK sovereign is to deteriorate such that it would impact the management strategy of the covered bonds programme. Royal Bank of Scotland plc (RBS): The 'AAA' rating of the covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB-'; (ii) the D-Cap is lowered to '0'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AAA' breakeven AP of 85.5%. Yorkshire Building Society (YBS): The 'AA+' rating of YBS covered bonds is vulnerable to downgrade if any of the following occurs (i) the IDR is downgraded to 'BBB'; (ii) the D-Cap is lowered to '3'; (iii) the level of AP that Fitch gives credit to in its analysis increases above Fitch's 'AA+' breakeven AP of 86%. Contact: Primary Analysts Stephen Kemmy (BoS-HBOS, Barc, Lloyds) Director +44 20 3530 1474 Fitch Ratings Limited 30 North Colonnade London E14 5GN Lukas Platzer (CBS, HSBC, LBS, NRAM, RBS, YBS) Analyst +44 20 3530 1589 Fitch Ratings Limited 30 North Colonnade London E14 5GN Kevin Vanistendael (Abbey, B&B, Coop, NBS) Analyst +44 20 3530 1564 Fitch Ratings Limited 30 North Colonnade London E14 5GN Iva Detelinova (BoS - Intelligent Finance, CLY) Analyst +44 20 3530 1663 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analysts Stephen Kemmy (CBS, Coop, LBS, NRAM, RBS, YBS) Director Lukas Platzer (Abbey, BoS - Intelligent Finance, Barc, B&B, Lloyds, NBS) Analyst Kevin Vanistendael (CLY, HSBC) Analyst Iva Detelinova (BoS - HBOS) Analyst Committee Chairperson Carmen Munoz Senior Director +34 93 323 8408 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: Derivative Addendum and Counterparty Criteria for Structured Finance and Covered Bonds, both dated 13 May 2014; Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds, dated 23 January 2014; EMEA RMBS Master Rating Criteria, dated 6 June 2013; EMEA Criteria Addendum - United Kingdom, dated 09 August 2012; Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum, dated 4 February 2014, all available at www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here EMEA RMBS Master Rating Criteria here EMEA Criteria Addendum - United Kingdom - Mortgage and Cashflow Assumptions 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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