Dec 11 - Fitch Ratings has affirmed HSBC’s (HSBC, ‘AA-‘/Stable/‘F1+’) GBP947m mortgage covered bonds at ‘AAA’ with a Stable Outlook following a downgrade of HSBC’s Issuer Default Rating (IDR) to ‘AA-‘/Stable/‘F1+’ from ‘AA’/Negative/‘F1+’ on 7 December 2012 and the application of the updated refinancing cost assumptions for the UK. Under Fitch’s covered bond rating criteria, a Discontinuity Cap (D-Cap) of 4 applies to this programme. When combined with HSBC’s Long-term IDR of ‘AA-‘, it allows for a maximum achievable rating on the programme of ‘AAA’. The ‘AAA’ rating would be vulnerable to downgrade if any of the following occurred: (i) the IDR was downgraded by four-notches or more to ‘BBB+’; or (ii) the D-Cap fell by at least four 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 87.0%. The Outlook on the covered bonds’ rating is Stable, as the Outlook on the IDR and on the UK residential mortgage assets are Stable. The agency takes into account the highest observed AP of the past 12 months (13.2%) in its analysis, as the issuer’s Short-term IDR is above ‘F3’. This allows the ratings of the covered bonds to be rated ‘AAA’ on a probability of default (PD) basis. The ‘AAA’ breakeven AP of 87.0% supports a ‘AA’ rating on a PD basis and a ‘AAA’ rating considering recoveries given default. The D-Cap of 4 is driven by the moderate risk assessment of liquidity gap and systemic risk, cover pool-specific and systemic alternative management and privileged derivatives. The asset segregation is assessed as very low risk from a discontinuity point of view (see “Fitch Puts YBS Covered Bonds on RWN; Assigns UK Programmes Outlooks & D-Caps” dated 13 September 2012 at www.fitchratings.com). Fitch now communicates the maximum level of AP that supports the assigned covered bond rating. The current ‘AAA’ breakeven AP is higher than the previous supporting AP of 80.2% due to (i) the lower PD stress being applied, as the previous level was based on ‘AAA’ PD; and (ii) the application of updated refinancing spread assumptions, which are lower than those previously applied (please see “Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress “ dated 14 November 2012 at www.fitchratings.com). Fitch has tested whether the asset, under the management of a third party, would be sufficient to service interest and principal on the bonds in a full and timely manner in a ‘AAA’ stress scenario. Maturity mismatches are significant, with the weighted-average (WA) life of the assets at 8.9 years and the WA of the liabilities at 2.2 years. If the pool migrated to the breakeven AP of 87.0%, this would create the need to raise liquidity, which Fitch assumes would be done by selling parts of the cover pool. 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.