Fitch Affirms Suncorp's Mortgage Covered Bonds 'AAA'/Stable

Mon Apr 28, 2014 9:13pm EDT

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(The following statement was released by the rating agency) SYDNEY, April 28 (Fitch) Fitch Ratings has affirmed Suncorp-Metway Limited's (SML, A+/Stable/F1) outstanding mortgage covered bonds totalling AUD2.2bn at 'AAA'. The Outlook is Stable. KEY RATING DRIVERS The rating is based on: SML's Long-Term Issuer Default Rating (IDR) of 'A+'; the unchanged Discontinuity Cap (D-Cap) of 3; and the asset percentage (AP) used in the asset coverage test (ACT) of 81.3%. The latter provides a cushion, compared to the breakeven AP of 89.5%. The Outlook on the covered bonds' ratings is Stable, reflecting the Stable Outlook on SML's IDR. The D-Cap of 3 is driven by the moderate high risk assessment of SML's liquidity gap and systemic risk. This is mainly driven by the agency's view of the liquidity gap mitigants in the form of a three-month interest reserve fund and the 12-month extendable period for the issued soft bullet bonds. Fitch has revised its risk assessment of the cover pool-specific alternative management down to moderate from moderate high, mainly due to updated IT systems used to manage the cover pool. The 'AAA' breakeven AP level of 89.5% 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 breakeven AP has improved from 85.3% as a result of the agency's revision of the Australian refinancing cost assumptions and the indexation of property values since the programme's last review. Maturity mismatches are significant, with the weighted average (WA) life of the assets being 14.2 years, and that of the liabilities 2.5 years. The Fitch breakeven AP for the covered bond rating will be affected by, among others, 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. In a 'AAA' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 10.3%, and a WA recovery rate of 73.3%. At end-March 2014, the cover pool consisted of 11,733 loans secured by first-ranking Australian residential mortgages with a total outstanding balance of AUD2.63bn. The portfolio has a WA current loan-to-value ratio (LVR) of 65.5%, a Fitch calculated WA current indexed LVR of 64.9%, and a WA seasoning of 61 months. The mortgage portfolio is distributed geographically, with the largest concentrations being in Queensland (57.1%) and New South Wales (25.3%). RATING SENSITVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: SML's IDR was downgraded by two or more notches; the D-Cap fell by more than two categories; or if the AP that Fitch takes into account in its analysis increased above the 'AAA' breakeven AP of 89.5%. Contacts: Primary Analyst Claire Heaton Director +61 2 8256 0361 Fitch Australia Pty Ltd, Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst James Leung Director +61 2 8256 0322 Committee Chairperson Ben McCarthy Managing Director +61 2 8256 0388 The source of information used to assess these ratings was Suncorp-Metway Limited. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. 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 ; and 'APAC Residential Mortgage Criteria', dated 1 August 2013; 'APAC Residential Mortgage Criteria Addendum - Australia', dated 1 August 2013; 'Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum' dated 4 February 2014; 'Global Criteria for Lender's Mortgage Insurance in RMBS', dated 1 August 2013, are available at www.fitchratings.com. Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here APAC Residential Mortgage Criteria - Amended here APAC Residential Mortgage Criteria Addendum – Australia - Amended here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here Global Criteria for Lenders’ Mortgage Insurance in RMBS here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=827995 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 FREE WEB SITE AT 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. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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