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RPT-Fitch Affirms NAB's Covered Bonds at 'AAA'/Stable
December 2, 2013 / 8:22 AM / in 4 years

RPT-Fitch Affirms NAB's Covered Bonds at 'AAA'/Stable

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Dec 2 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed National Australia Bank Limited’s (NAB, AA-/Stable/F1+) outstanding AUD11.7bn mortgage covered bonds at ‘AAA’. The Outlook is Stable.


The rating is based on: NAB’s Long-Term Issuer Default Rating (IDR) of ‘AA-'; the unchanged Discontinuity Cap (D-Cap) of 3; and the asset percentage (AP) used in the asset coverage test (ACT) of 88.3%. The latter provides a small cushion, compared with the breakeven AP of 89.5%. The agency relies on the AP used in the ACT as Australia’s Banking Act stipulates that assets held in excess of this, through a demand loan, do not form part of the cover pool at issuer insolvency.

The Outlook on the covered bonds’ ratings is Stable, which reflects the Stable Outlook on NAB’s IDR, the Australian sovereign rating and the Australian residential mortgage asset outlook.

Fitch’s ‘AAA’ breakeven AP level of 89.5% supports a ‘AA’ rating on a probability of default (PD) basis, and allows for a two-notch recovery uplift for the covered bonds in a ‘AAA’ scenario. The breakeven AP has improved from 89.0% due to the agency’s recently revised Australian refinancing cost assumptions (RCA), and it now falls in the RCA range of Group B. See ”Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum’, dated 3 June 2013 for further information.

Maturity mismatches are significant, with the weighted average (WA) life of the assets at 16.3 years, and that of the liabilities at 6.0 years. The Fitch breakeven AP for the covered bond rating will be affected by, among others, 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.

The D-Cap of 3 is driven by the moderate-high risk assessment of NAB’s liquidity gap and systemic risk. This is mainly driven by the agency’s view of the liquidity gap mitigants in the form of a three-month interest reserve fund, the 12-month extendable period for the issued soft bullet bonds, and the pre-maturity test for the issued hard bullet bonds. The pre-maturity test allows up to a 12-month cure period, in the aftermath of an issuer default, where a scheduled hard bullet covered bond maturity falls due within the test breach period and has not been funded.

Fitch has maintained its low risk assessment of the cover pool-specific alternative management, reflecting the agency’s view of the IT systems, processes and the delivery and quality of data received by Fitch as compared with NAB’s peers. The moderate risk assessment assigned to systemic alternative management and privileged derivatives, and the very low risk assessment of asset segregation have remained unchanged.

In a ‘AAA’ scenario, Fitch has calculated the pool’s cumulative WA frequency of foreclosure at 9.4%, and a WA recovery rate of 65.6%. As of October 2013, the cover pool consisted of 55,094 loans secured by first-ranking Australian residential mortgages with a total outstanding balance of AUD15.3bn. The portfolio is wholly made up of full documentation loans that have WA current loan-to-value ratio (LVR) of 62.5%, a Fitch calculated WA current indexed LVR of 62.3% and a WA seasoning of 34.4 months. Floating rate loans represent 91.6% and fixed rate loans 8.4% of the cover pool by balance. The mortgage portfolio is distributed geographically with the largest concentrations being in New South Wales (34.3%) and Victoria (30.3%).


The ‘AAA’ rating would be vulnerable to downgrade if any of the following occurred: NAB’s IDR was downgraded by three notches; the D-Cap fell by more than two categories; or if the AP that Fitch takes into account in its analysis increased above the ‘AAA’ breakeven AP of 89.5%.

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