(The following was released by the rating agency)
SYDNEY, December 14 (Fitch) Fitch Ratings has assigned National Australia Bank's (NAB, 'AA-'/Stable/'F1+') Series 10 EUR1bn mortgage covered bonds 'AAA' ratings. The Outlook is Stable. This issue brings NAB's outstanding covered bonds to AUD7.5bn.
All bonds are guaranteed by Perpetual Corporate Trust as trustee of the NAB Covered Bond Trust.
The rating is based on NAB's Long-term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 (moderate high) and an asset percentage (AP) of 87.0%, which is equivalent to Fitch's breakeven AP for a 'AAA' rating.
The 'AAA' rating would be vulnerable to a downgrade if the IDR is downgraded by three or more notches; if the Discontinuity-Cap (D-Cap) falls by more than two categories; or if the programme's AP rises above 87.0%.
The driver of the D-Cap is the moderate high risk assessment for liquidity gap and systemic risk. This is principally driven by programme documentation which provides, in certain circumstances, for a 12-month period prior to a scheduled covered bond maturity for cover pool asset sales.
This provision is equivalent to Fitch's assessment of the time required to sell cover pool assets in Australia at 12 months. The D-Cap of 3, when combined with NAB's IDR and recovery uplift, supports a 'AAA' rating on the covered bonds. As of 2 November 2012, the cover pool consisted of 36,393 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD9.67bn.
The portfolio is wholly made up of full documentation loans, which have a weighted average current loan-to-value ratio of 63.5%, and a weighted average seasoning of 33.2 months. Floating-rate loans comprise 93% of the cover pool. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 8.4%, and a weighted average recovery rate of 58.2%.
The cover pool is geographically distributed across Australia's states, with the largest concentrations being in New South Wales (37.8%) and Victoria (32.3%). The agency's mortgage default analysis is based on its Australian residential mortgage criteria. 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 issuance. Therefore it cannot be assumed to remain stable over time.