July 4, 2017 / 4:08 AM / 3 months ago

Fitch Rates BNZ's Series 10 EUR750m Mortgage Covered Bonds 'AAA'/Stable

(The following statement was released by the rating agency) SYDNEY, July 04 (Fitch) Fitch Ratings has assigned Bank of New Zealand's (BNZ, AA-/Stable/F1+) Series 10 EUR750 million of mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. The fixed-rate bond is due in July 2024, and benefits from a 12-month extendable maturity. Series 10 is issued by BNZ International Funding Limited (BNZ-IF), a guaranteed issuing vehicle used for international funding by BNZ. This brings the total outstanding issuance from the programme to NZD5.1 billion, with offshore issuance through BNZ-IF accounting for 81.3% of total issuance. KEY RATING DRIVERS The rating is based on BNZ's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches, a recovery uplift of one notch and an asset percentage (AP) of 83.3%, which is the highest nominal AP over the past 12 months and provides a substantial buffer of protection compared to Fitch's breakeven AP of 90.5%. The AP supports a 'AA+' tested rating on a probability-of-default basis and a 'AAA' rating after giving credit for recoveries from the cover assets given default of the covered bonds. The Stable Outlook on the covered bonds reflects the four-notch buffer against a downgrade of the bank's IDR. The 'AAA' breakeven AP of 90.5% corresponds to a breakeven overcollateralisation (OC) of 10.5% and is driven by the asset disposal loss component of 14.7%, reflecting the significant maturity mismatches modelled in the programme, with the weighted-average residual life of the assets at 13.9 years and the liabilities at 3.2 years. The credit loss component contributes 3.6% and the cash flow valuation component decreases the OC by 8.2%, representing the excess spread modelled by Fitch in the programme. The rating's recovery uplift is capped at one notch, as foreign-exchange risk could affect recoveries given a default of the covered bonds. Although there are swaps in place on the liabilities denominated in euros, we expect those swaps to terminate upon a covered bond default. This would mean the longer-dated New Zealand dollar asset cash flows would be providing recoveries for the euro-denominated covered bonds. RATING SENSITIVITIES Bank of New Zealand's covered bonds would be vulnerable to a downgrade if the AP we rely upon rises above the breakeven AP of 90.5% or the bank's IDR fell below 'BBB+'. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other things, 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 that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time. Contact: Primary Analyst Sambit Agasti Associate Director +61 2 8256 0337 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Ben McCarthy Managing Director +61 2 8256 0388 Date of Relevant Rating Committee: 28 June 2017 The source of information used to assess these ratings was Bank of New Zealand. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 27 Apr 2017) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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