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Fitch Affirms Coventry Building Society's Covered Bonds at 'AAA'; Outlook Stable
May 11, 2017 / 4:17 PM / 5 months ago

Fitch Affirms Coventry Building Society's Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 11 (Fitch) Fitch Ratings has affirmed Coventry Building Society's (A/Stable/F1) GBP3,622 million equivalent mortgage covered bonds at 'AAA' with a Stable Outlook. KEY RATING DRIVERS The covered bonds' rating is based on Coventry's Long-Term Issuer Default Rating (IDR) of 'A', an unchanged IDR uplift of two notches, an unchanged payment continuity uplift (PCU) of six notches and the 79.3% asset percentage (AP) that Fitch gives credit to, which provides more protection than the 87.5% 'AAA' breakeven AP. The latter supports a 'AA+' tested rating on a probability of default basis and a one-notch recovery uplift (RU) to 'AAA'. The Stable Outlook on the covered bonds' rating reflects that on the issuer and a four-notch buffer against a downgrade due to the different uplift factors above Coventry's IDR. The 'AAA' breakeven AP is unchanged at 87.5%, corresponding to a breakeven overcollateralisation (OC) of 14.3%. The asset disposal loss component of 15.2% in a 'AA+' tested rating scenario remains the main driver of the breakeven OC due to the maturity mismatches between the cover pool and the covered bonds (10.3 years versus 4.1 years). This creates the need for a stressed asset sale to meet timely payments on the bonds should recourse against the cover pool be enforced. Credit loss component is 3.5% based on the 'AA+' tested rating on the PD basis. The cash flow valuation component is -4.4%, reflecting the excess spread and longer weighted average (WA) life of assets than that of liabilities. The IDR uplift, PCU and RU were first assigned to the programme on 30 November 2016 following the implementation of the agency's revised Covered Bonds Rating Criteria, which was published on 26 October 2016. The unchanged IDR uplift of two notches reflect that collateralised covered bonds in the UK are exempt from bail-in, the risk of under-collateralisation is deemed sufficiently low, and a resolution of Coventry, should it happen, is not likely to result in the direct enforcement of the recourse against the cover pool, and that Coventry's IDR of 'A' is driven by its Viability Rating of 'a'. The PCU of six notches reflects the 12 months' liquidity protection in place allowed by the 12-month maturity extension applicable to the soft-bullet bonds. A reserve fund has also been established to cover three months' interest payments and some senior expenses. Amounts due under the interest-rate swap on cover assets rank senior to the payments under the covered bond swap but are not sized in the reserve fund. However, it would become subordinated in case the issuer, acting as swap counterparty, defaulted. The RU for the programme is capped at one notch due to the presence of significant pre-swap foreign-exchange (FX) mismatches between cover assets and liabilities. The FX covered bonds are fully hedged until maturity (including the extension period if applicable), but upon a covered bonds' event of default, recoveries from assets denominated in British pounds, which have a longer WA life than the covered bonds, could expose holders of non-pound-denominated bonds to FX risk. Based on the loan-by-loan data at end March 2017, the 'AAA' WA foreclosure frequency (FF) is 9.5% and the 'AAA' WA recovery rate (RR) is 58.0%. Coventry's cover pool is of good quality, while improvements of the 'AAA' WAFF and WARR are constrained by the 4% minimum 'AAA' expected loss assumed in Fitch's criteria to account for idiosyncratic risks. RATING SENSITIVITIES The 'AAA' rating of Coventry's mortgage covered bonds is vulnerable to a downgrade if any of the following occurs: the bank's Long-Term IDR is downgraded by five notches to 'BB+' or below; the number of notches represented by the IDR uplift, the PCU and the recovery uplift is reduced to four or lower; or the relied-upon AP rises above Fitch's 'AAA' breakeven AP of 87.5%. In this programme, Fitch gives credit to the highest level of AP of 79.3% calculated during the preceding 12 months, as the issuer's Short-Term IDR is not lower than 'F2' and the programme is not in wind-down or dormant. If the nominal AP in the programme rises to the 87.0% AP used in the asset coverage test disclosed in the programme's investor reports, the 'AAA' rating will be unchanged. 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. The breakeven AP to maintain the covered bond rating cannot therefore be assumed to remain stable over time. Contact: Primary Analyst Justina Niu Associate Director +44 20 3530 1589 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Anne-France Chane Analyst +44 20 3530 1491 Committee Chairperson Cosme de Montpellier Senior Director +44 20 3530 1407 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria Addendum: UK Residential Mortgage Assumptions (pub. 03 Feb 2017) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Criteria for Rating Currency Swap Obligations of an SPV in Structured Finance Transactions and Covered Bonds (pub. 11 Aug 2016) here EMEA RMBS Rating Criteria (pub. 29 Nov 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Fitch’s Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance – Excel File (pub. 26 Oct 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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