July 29, 2014 / 8:12 AM / 4 years ago

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

(The following statement was released by the rating agency) SYDNEY, July 29 (Fitch) Fitch Ratings has affirmed Bank of New Zealand's (BNZ, 'AA-'/Stable/'F1+') NZD4.6bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. The covered bonds have been issued through BNZ and BNZ International Funding Limited (BNZIF), a guaranteed issuing vehicle used for international funding by BNZ. The rating is based on: BNZ's Long-Term Issuer Default Rating (IDR) of 'AA-'; the unchanged Discontinuity Cap (D-Cap) of 3; and the highest nominal asset percentage (AP) in the last 12 months (83.3%). The Outlook on the covered bonds' ratings is Stable, which reflects the Stable Outlook on BNZ's IDR. Fitch's 'AAA' breakeven AP has increased to 86.5% from 86%, driven by lower mortgage refinancing spread level assumptions for New Zealand which were updated September 2013. The cover pool credit quality has remained relatively stable over the past 12 months. Fitch's calculated 'AAA' credit loss is 4%, driven by the application of a minimum credit loss at 'AAA' in the agency's analysis. As of June 2014, the cover pool consisted of 39,531 loans secured by first-ranking mortgages on New Zealand residential properties with a total outstanding balance of NZD5.5bn, plus NZD4.5m of cash. The portfolio is wholly made up of full documentation loans which have a weighted average current loan-to-value ratio of 51.8%, and a weighted average seasoning of 43.3 months. The mortgage portfolio is geographically distributed across New Zealand's regions, with the largest concentrations being in Auckland (39.1%), Wellington (12.7%) and Canterbury/West Coast (14.1%). The unchanged D-Cap of 3 reflects Fitch's moderate-high risk assessment of the liquidity gap and systemic risk component. This is driven by the agency's view of the liquidity gap mitigants in the form of a three-month interest reserve fund and the pre-maturity test for the issued hard bullet bonds, that allows for a mandatory 12 month asset sale period prior to a scheduled hard bullet covered bond maturity. In comparison, Fitch has assessed the time required to sell cover pool assets in New Zealand to be at least 12 months in a stressed market. For programmes that have not publicly issued for more than two years, Fitch may adjust the cover pool-specific alternative management component of the D-Cap, notably to reflect the risk of overcollateralization and asset pool quality not being maintained by the issuer. However, the agency has not lowered the D-Cap for this programme, as it believes it is unlikely the issuer will provide less support for this programme. Furthermore, the issuer is in the process of registering the programme with the Reserve Bank of New Zealand, which in Fitch's view will increase the level of oversight on the programme. RATING SENSITVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) BNZ's IDR was downgraded by three notches to 'A-'; (ii) the D-Cap fell by three 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 86.5%. 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. Contacts: Primary Analyst James Leung Director +852 2263 9912 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway Hong Kong Secondary Analyst Claire Heaton Director +61 2 8256 0361 Committee Chairperson Natasha Vojvodic Senior Director +61 2 8256 0350 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. The source of information used to assess these ratings was Bank of New Zealand Limited. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Additional information is available at www.fitchratings.com Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 March 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 and Refinance Stress Addendum 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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