Fitch Affirms ANZ Bank New Zealand's Mortgage Covered Bonds 'AAA'; Outlook Stable

Thu Aug 28, 2014 2:41am EDT

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(The following statement was released by the rating agency) SYDNEY, August 28 (Fitch) Fitch Ratings has affirmed ANZ Bank New Zealand's (ANZNZ, 'AA-'/Stable/'F1+') NZD3.9bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. The covered bonds are issued through ANZ New Zealand (Int'l) Limited (ANZNIL), a guaranteed issuing vehicle used for international funding by ANZNZ. KEY RATING DRIVERS The rating is based on: ANZ''s Long-Term Issuer Default Rating (IDR) of 'AA-'; the unchanged Discontinuity Cap (D-Cap) of 2; and the highest nominal asset percentage (AP) in the last 12 months (70.2%). The Outlook on the covered bonds' ratings is Stable, which reflects the Stable Outlook on ANZNZ's IDR. The 'AAA' breakeven AP of 85.5%, corresponding to a breakeven overcollateralisation (OC) of 17% is driven by the asset disposal loss component of 14.3% due to maturity mismatches and the refinancing assumptions applied to New Zealand residential mortgages, followed by the cover pool's credit loss of 4.6% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 1.2% due to the longer weighted average life of the assets versus the liabilities. The 'AAA' breakeven AP has improved from 81% due to the 12.1% reduction of flexi loans (an at-call line-of-credit product), linked to mortgage loans included in the cover pool. For this rating, which considers both an uplift on a probability of default basis and for recoveries given default, the asset disposal loss component is in line with the rating scenario that is tested for timely payments (i.e. 'AA' tested rating on a PD basis), while the other breakeven OC components represent 'AAA' stresses. This, plus Fitch's testing for at least 91% recoveries rather than 100% to assign two notches credit for recoveries given default, is why the sum of the breakeven OC drivers is higher than ANZNZ's 'AAA' breakeven OC. As of 30 July 2014, the cover pool consisted of 49,076 loans secured by first-ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD7.29bn. Fitch's calculated 'AAA' credit loss is 6.2% and is relatively high when compared to peers. This is due to the inclusion of flexi and interest only short dated bullet loans within the cover pool, which in Fitch's opinion increases the credit risk of the portfolio. The unchanged D-Cap of 2 reflects Fitch's weak link assessment of liquidity gap and systemic risk. This is driven by the agency's view of the liquidity gap mitigatants, in the form of a three-month interest reserve fund and the pre-maturity test for the issued hard bullet bonds. Fitch has revised its risk assessment of the cover pool-specific alternative management down to low from moderate, mainly due to the quality IT systems and processes used to manage the cover pool. RATING SENSITVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) ANZNZ's IDR was downgraded by two notches to 'A'; (ii) the D-Cap fell by two categories to 0 (full discontinuity); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis, increased above Fitch's 'AAA' breakeven AP of 85.5%. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, amongst 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 the 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the portfolio and Fitch's analysis will be available in a full rating report, which will shortly be available at www.fitchratings.com. 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 ANZ Bank New Zealand Limited. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. Additional information is available at www.fitchratings.com Applicable criteria, 'Covered Bonds Rating Criteria', dated 8 August 2014; 'Counterparty Criteria for Structured Finance and Covered Bonds ', dated 13 May 2014; 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 13 May 2014; 'APAC Residential Mortgage Criteria', dated 23 June 2014; 'APAC Residential Mortgage Criteria Addendum - New Zealand', dated 23 June 2014; 'Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum' dated 4 February 2014, are 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 here APAC Residential Mortgage Criteria Addendum – New Zealand here Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum – Effective 14 November 2012 to 3 June 2013 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 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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