Dec 14 - Fitch Ratings has affirmed Barclays Bank plc's (Barclays Bank,
'A'/Stable/'F1') GBP16bn regulated mortgage covered bonds at 'AAA' with a Stable
Under Fitch's covered bond rating criteria, a Discontinuity Cap (D-Cap) of 3
applies to this programme. When combined with Barclays Bank's Long-term Issuer
Default Rating (IDR) of 'A', it allows for a maximum achievable rating of 'AAA'
for the covered bonds. Barclays Bank's D-Cap has not changed since it was last
reviewed in September 2012 (see "Fitch Puts YBS Covered Bonds on RWN; Assigns UK
Programmes Outlooks & D-Caps" dated 13 September 2012 at www.fitchratings.com).
The 'AAA' rating would be vulnerable to downgrade if any of the following
occurred: (i) the IDR was downgraded by one-notch to 'A-'; or (ii) the D-Cap
fell by one category to 2 (High risk); or (iii) the asset percentage (AP) that
Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven
AP of 78.0%. The Outlook on the covered bonds' rating is Stable, which is mainly
due to the Stable Outlook on Barclays Bank's IDR.
The agency takes into account the highest observed AP of the past 12 months
(58.8%) in its analysis, as the issuer's Short-term IDR is above 'F3'. The
breakeven AP of 78.0% supports a 'AA' rating on a probability of default (PD)
basis and a 'AAA' rating considering recoveries given default.
The D-Cap of 3 is driven by the moderate high risk assessment of the liquidity
gap & systemic risk, which is the weakest of the D-Cap components. The asset
segregation and systemic alternative management risk is assessed as low and the
cover pool-specific alternative management and privileged derivatives were
assessed at moderate risk from a discontinuity point of view.
The moderate high risk assessment for the liquidity gap and systemic risk
reflects the agency's view on the pre-maturity test for the hard bullet bonds
within the programme. A breach of this pre-maturity test leads to an issuer
event of default and a sale of cover assets by the LLP at least six months prior
to a scheduled covered bond maturity, while Fitch has assessed the stressed time
to sell residential mortgage cover assets in the UK as nine months. Fitch also
considers the liquidity mitigants in the form of a three-month interest reserve
fund and a 12-month extendible maturity on the soft-bullet bonds within this
The Fitch 'AAA' breakeven AP level of 78.0% supports a 'AA' rating on a PD basis
and allows for a two-notch recovery uplift for the covered bonds in a 'AAA'
scenario. It is higher than the previous supporting AP of 76.5%. The 'AAA'
breakeven AP has improved due to (i) the application of updated refinancing
spread assumptions lower than those previously applied (see "Covered Bonds
Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum" dated 14
November 2012 at www.fitchratings.com); (ii) an amended increased total return
swap margin on the asset swap; and (iii) the lower stresses applied due to the
migration of the PD rating from 'AA+' to 'AA' in September 2012 as a result of
the updated criteria. These elements more than compensated for the marginal
deterioration of the asset pool primarily due to the pool top-up in 2012 and
also the relatively poorer repossession data provided by the issuer on the total
mortgage book, which was higher than Fitch's criteria assumptions.
Interest rate mismatches are hedged. The cover assets yield both floating and
fixed rates and a total return swap is in place with Barclays Bank to transform
the interest collections from the cover assets into one-month GBP LIBOR plus
78bp. The bonds yield both fixed and floating rates and are in euro, sterling,
US dollar and Swiss franc. Both interest and currency rate risk is also hedged
with Barclays Bank. Maturity mismatches are significant, with the
weighted-average life of the assets at 11.8 years and of the liabilities at 5.5
At end-November 2012, the cover pool consisted of GBP26.6bn of residential
mortgages. The pool consisted of 203,915 loans secured on residential properties
in the UK with 30.1% on interest-only repayments and 72.8% tracker rate loans.
The mortgage portfolio had a weighted average (WA) current indexed loan to value
(LTV) ratio of 59.6% and a seasoning of 43 months. The WA Indexed CLTV ratio is
unchanged but the seasoning has increased from 37.7% in November 2011. The cover
pool assets are reasonably diversified over the UK, with the highest
concentrations mainly in south east (38.9%), Greater London (12.7%), south west
(7.8%), north west (7.3%) and east Anglia (7.1%). There are no buy to let loans
or offset mortgage loan products in the cover pool. In a 'AAA' scenario, Fitch
has calculated the pool's cumulative WA frequency of foreclosure at 17.4% and a
WA recovery rate of 61.1%.
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 issuances.
Therefore it cannot be assumed to remain stable over time.
Additional information is available at www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 Sept 2012,
Counterparty Criteria', dated 25 July 2012, 'EMEA Residential Mortgage Loss
Criteria', dated 7 June 2012 and 'EMEA Residential Mortgage Loss Criteria
Addendum - United Kingdom', dated 09 August 2012, are available on
Applicable Criteria and