-- Following our CreditWatch Negative placement of our rating on the
Northern Rock (Asset Management) PLC Global Covered Bond Programme on
July 12, 2012, we have today affirmed and removed from CreditWatch negative our
'AAA' ratings on the program and related series. The outlook is stable.
-- The covered bond rating process that we have employed follows the
methodology and assumptions outlined in our covered bond ratings framework
Dec 6 - Standard & Poor's Ratings Services today affirmed and removed from
CreditWatch negative its 'AAA' credit ratings on the Northern Rock (Asset
Management) PLC Global Covered Bond Programme and all issuances of covered bonds
issued under the program. The outlook is stable (see list below).
Following the publication of our counterparty risk framework criteria,
originally published on May 31, 2012, since republished on Nov. 29, 2012 (see
"Counterparty Risk Framework Methodology And Assumptions"), and the "Covered
Bonds Counterparty And Supporting Obligations Methodology And Assumptions,"
published on May 31, 2012, we placed our rating on the program on CreditWatch
negative on July 12, 2012, as the program was affected by these criteria and
we had not received any action plan from the issuer.
INTEREST RATE SWAP
To hedge against the variances between the interest received on the assets in
the cover pool and the interest payable on the covered bonds, the issuer has
entered into an interest rate swap with Northern Rock (Asset Management)
(NRAM) as swap counterparty. The replacement framework for this swap is not
consistent with our 2012 counterparty criteria general framework. The issuer
has confirmed to us that it does not intend to update the replacement
frameworks under the current swap documentation. Therefore, we have modeled
the cash flows assuming that the interest rate swap is not in place. In
modeling the interest rate mismatches, we have considered the asset profile of
the cover pool (which has variable paying assets indexed on NRAM's standard
variable rate or the Bank of England base rate as well as fixed-rate
paying assets) and applied haircuts to account for basis risk.
COVERED BOND SWAPS
The LLP has entered into covered bond swaps to hedge currency mismatches
between the amounts received by the LLP and the amounts payable by the LLP
under the covered bond guarantee.
All covered bond swaps are provided by counterparties unrelated to the issuer.
Therefore, we have assessed counterparty exposure to these external
counterparties in accordance with our 2012 covered bond counterparty criteria.
As per table 1 of this criteria, we apply a three-step process for determining
the maximum potential covered bond rating.
-- Step 1: We classify the covered bond program based on single unrelated
counterparty concentration. We classify the program in bucket 2 because one of
the unrelated counterparties has a concentration greater than 25%.
Counterparty Swap Counterparty Exposure
Bank PLC 338,250,000 A+/Negative/A-1 5.93%
Natixis S.A. 683,000,000 A/Negative/A-1 11.97%
PLC 341,800,000 AA-/Negative/A-1+ 5.99%
RBS PLC 1,624,669,484 A/Stable/A-1 28.48%
N.A. 691,419,484 A/Negative/A-1 12.12%
UBS AG 972,168,720 A/Stable/A-1 17.04%
Bank AG 1,053,668,720 A+/Negative/A-1 18.47%
RBS PLC--The Royal Bank of Scotland PLC.
-- Step 2: We calculate the applicable issuer credit rating (ICR) on the
derivative counterparties. For programs in bucket 2, the applicable ICR is the
lowest rated counterparty. The lowest rated counterparties are rated 'A'
(Natixis S.A., The Royal Bank of Scotland PLC, Citibank N.A., and UBS AG).
NRAM's ICR is also 'A'.
-- Step 3: Based on the combination of the ICR on the lowest rated
counterparty and the ICR on the issuer, we deduct one notch from the maximum
potential rating uplift from the ICR on the issuer achieved under our 2009
asset-liability mismatch (ALMM) criteria (see "Revised Methodology And
Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds,"
published on Dec. 16, 2009).
THE COVERED BOND RATING
We have applied our five-step approach for rating covered bonds. We have
reviewed projected cash flow information as of Nov. 1, 2012.
Standard & Poor's Covered Bond Rating Process
Classification of ALMM 0% = Low
Program categorization: Category 2
Maximum potential rating uplift: 6 notches
Deduction for counterparty risk : 1 notch
Maximum potential rating uplift
after counterparty risk: 5 notches
Distance between ICR and maximum potential rating: 5 notches
Target credit enhancement (%): 42
Available credit enhancement (%): 103
ICR--Issuer credit rating.
Based on ALMM criteria.
Including counterparty risk.
Based on the five-step process above, the level of target credit enhancement
remains below the available credit enhancement allowing us to assign maximum
achievable ratings of 'AAA' to the covered bonds. We have therefore affirmed
and removed from CreditWatch negative our 'AAA' ratings on NRAM's covered bond
program and related series.
The stable outlook on the program is supported by:
-- The sizable cushion of available credit enhancement above the target
-- The issuer's ability to maintain the current ratings on the covered
-- The expectation that the ALMM will remain low over the next 12 months;
-- The fact that it would take a two-notch downgrade on any of the lowest
rated covered bond swap counterparties to result in a one notch deduction on
the transaction; and
-- The stable outlook on the issuer, Northern Rock (Asset Management) PLC.
RELATED CRITERIA AND RESEARCH
-- Counterparty Risk Framework Methodology and Assumptions, Nov. 29,
-- U.K. Prime RMBS Index Report Q3 2012: Ratings Likely To Remain Stable,
Despite Performance Deterioration, Nov. 20, 2012
-- Covered Bonds Rating Framework: Methodology and Assumptions, June 26,
-- General Criteria: Global Investment Criteria For Temporary Investments
In Transaction Accounts, May 31, 2012
-- Covered Bonds Counterparty And Supporting Obligations Methodology And
Assumptions, May 31, 2012
-- U.K. RMBS Methodology And Assumptions, Dec. 9, 2011
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology
And Assumptions, June 14, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Revised Methodology And Assumptions For Assessing Asset-Liability
Mismatch Risk In Covered Bonds, Dec. 16, 2009
-- European Legal Criteria For Structured Finance Transactions, Aug. 28,
*Criteria fully supersedes "Counterparty Risk Framework Methodology and
Assumptions," published on May 31, 2012.
Rating Program/ To From
Country: Covered bond type
Ratings Affirmed And Removed From CreditWatch Negative
Northern Rock (Asset Management) PLC Covered Bond Programme
AAA/Stable AAA/Watch Neg