Jan 25 - Fitch Ratings has affirmed Yorkshire Building Society's
(YBS, 'BBB+'/Stable/'F2') GBP1.75bn equivalent regulated mortgage covered bonds
at 'AA+' with a Stable Outlook.
Under Fitch's covered bond rating criteria, a Discontinuity Cap (D-Cap) of 4
applies to the programme. When combined with YBS's Long-term Issuer Default
Rating (IDR) of 'BBB+', it allows for a maximum achievable rating of 'AA+' for
the covered bonds.
The 'AA+' rating would be vulnerable to downgrade if any of the following
occurred: (i) the IDR was downgraded by one-notch to 'BBB'; or (ii) the D-Cap
fell by one category to 3 (moderate high risk); or (iii) the asset percentage
(AP) that Fitch takes into account in its analysis increased above Fitch's 'AA+'
breakeven AP of 85.0%. The Outlook on the covered bonds' rating is Stable, which
reflects the Stable Outlook on YBS's IDR.
The agency takes into account the highest observed nominal AP of the past 12
months (60.4%) in its analysis, as the issuer's Short-term IDR is above 'F3'.
This provides ample cushion, compared with the breakeven AP of 85.0% for the
The D-Cap of 4 is driven by the moderate risk assessment of the liquidity gap &
systemic risk, systemic alternative management and privileged derivatives which
are the weakest of the D-Cap components. The asset segregation has been assessed
as very low and the cover pool-specific alternative management was assessed at
low risk from a discontinuity point of view.
The liquidity gap assessment reflects the agency's view of the mitigants in the
form of a three-month interest reserve fund and a 12-month extendible maturity
on the covered bonds. The systemic alternative management score reflects the
positive effect of the active oversight taken by the FSA under the UK regulated
covered bonds framework. Finally, the privileged derivatives assessment is due
to internal interest rate swaps being in place that are considered highly
material for the programme
The Fitch 'AA+' breakeven AP level of 85.0% supports a 'AA-' rating on a PD
basis and allows for a two-notch recovery uplift for the covered bonds in a
'AA+' scenario. It is lower than the previous breakeven AP of 86.5%. The 'AA+'
breakeven AP deteriorated due to (i) the change in the pool composition since
the last review; and (ii) the impact of the poorer repossession data provided by
YBS on the total mortgage book, which was lower than Fitch's criteria
An asset coverage test (ACT) is calculated monthly to ensure that a minimum
level of credit enhancement is maintained at any time. In addition to the AP
that applies to the nominal value of the assets, a negative carry factor is used
in the ACT to calculate an additional amount of collateral to compensate for the
risk of the limited liability partnership having to hold funds yielding less
than the interest on the covered bonds. The amount is the product of the
weighted average (WA) remaining maturity of the outstanding series of covered
bonds (3.9 years), the GBP equivalent of the aggregate amount of outstanding
covered bonds (GBP1.7bn) and the negative carry factor (2.02%, a function of the
WA margin on the covered bond swaps). The higher the WA margin on the covered
bonds swaps, the higher amount of additional collateral is needed.
Interest rate mismatches are hedged. The cover assets yield both floating and
fixed rates and a swap is in place with YBS to transform the interest
collections from the cover assets into three-month GBP LIBOR plus a spread. The
bonds yield both fixed and floating rates and are denominated in euro and
sterling. Both interest and currency rate risks are hedged with HSBC Bank plc
('AA-'/Stable/'F1+'). Maturity mismatches are significant, with the
weighted-average life of the assets at 11 years and of the liabilities at 3.9
At end-November 2012, the cover pool consisted of GBP3.5bn of residential
mortgages. The pool consisted of 34,992 loans secured on residential properties
in the UK with 12.6% on interest-only repayments and 58.1% fixed rate loans.
Furthermore, there are no buy-to-let loans and all borrower income has been
verified. The mortgage portfolio had a WA current indexed loan to value ratio of
61.6% and seasoning of 66 months. The cover pool assets are reasonably
diversified over the UK, with the exception of Yorkshire & Humberside (19.7%).
Fitch accounted for this potential concentration risk in its analysis by
increasing the probability of default for these loans. In a 'AA+' scenario,
Fitch has calculated the pool's cumulative WA frequency of foreclosure at 17.4%
and a WA recovery rate of 59.9%.
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, 'Covered Bond Rating Criteria -
Mortgage Liquidity & Refinance Stress Addendum' dated 14 November 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 www.fitchratings.com.
Applicable Criteria and Related Research:
Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum
EMEA Residential Mortgage Loss Criteria
EMEA Criteria Addendum - United Kingdom - Mortgage and Cashflow Assumptions
Covered Bonds Rating Criteria - Amended
Covered Bonds Counterparty Criteria