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TEXT-Fitch may cut Yorkshire Building Society covered bonds
September 13, 2012 / 4:40 PM / 5 years ago

TEXT-Fitch may cut Yorkshire Building Society covered bonds

Sept 13 - Fitch Ratings has placed Yorkshire Building Society Society's
(YBS; 'BBB+'/Stable/'F2') mortgage covered bonds' 'AAA' rating on Rating Watch
Negative (RWN) and maintained Co-operative Bank plc's (Coop; 'BBB+'/RWN/'F2')
covered bonds on RWN. Fitch has also assigned D-Caps and Outlooks to UK covered
bond programmes, following publication of its updated Covered Bonds Rating
Criteria. A full list of rating actions is at the end of this release. 

The RWN on YBS's covered bonds reflects that the programme analysis no longer 
supports its current rating, following the implementation of the updated Covered
Bonds Rating Criteria. Coop's covered bonds have been maintained on RWN due to 
the Issuer Default Rating (IDR) being on RWN, and additionally now for the same 
reason as outlined for YBS. For both programmes, the D-Cap of 4 (moderate risk),
would cap the covered bond rating at 'AA+', which also considers a two-notch 
recovery uplift. The asset percentage (AP) that Fitch takes into account in its 
analysis should not further limit the rating.  

Fitch expects to receive feedback from YBS and Coop within one month regarding 
any plans to change their programmes. If no changes are proposed, Fitch expects 
to downgrade the ratings. If changes likely to impact the ratings are proposed, 
Fitch will review any implementation plans to determine how the RWN should be 
resolved. If changes are implemented that address the drivers of a potential 
downgrade, the agency will affirm the ratings.

The Negative Outlooks assigned to Bradford & Bingley (B&B) and Northern Rock 
Asset Management's (NRAM) covered bonds' 'AAA' ratings are due to the Negative 
Outlook on the UK sovereign's 'AAA' rating. The ratings rely heavily on the 
involvement of the UK sovereign in the programmes, either in the form of 
guarantees on the covered bonds or through strong involvement with the issuer. 
The two programmes have not been assigned D-Caps because the ratings are not 
based on the standard covered bonds methodology to consider the combination of 
IDR and D-Cap.

The Stable Outlooks assigned to the ratings of the remaining UK programmes are 
due to the Stable Outlooks on the IDR of the issuer in most cases. If the IDRs 
are Negative, a one-notch downgrade would not be expected to lead to a downgrade
of the covered bonds. The Negative Outlook on the sovereign rating is also not a
driver as a one-notch downgrade would not be expected to impact the covered bond
ratings. Finally, Fitch's expectation is that both the asset performance and AP 
maintenance will remain stable. 

D-Caps determine the maximum rating notch uplift from the IDR to the covered 
bond rating on a probability of default (PD) basis reflecting Fitch's view of 
the likelihood of a programme defaulting in the aftermath of an issuer default. 
Apart from a D-Cap of 8 (minimal discontinuity), the D-Cap is based on the 
highest risk assessment of the following components: asset segregation, 
liquidity gap and systemic risk, alternative management (systemic and cover 
pool-specific) and privileged derivatives. 

D-Caps of 8 are assigned when programmes have no liquidity gaps and there is 
protection for interest payments, in line with Fitch's criteria. The assessments
of the components are published for programmes with a D-Cap of 8 but the highest
risk assessment does not drive the result unless Fitch expects that a weakness 
in any of the components would compromise the overall minimal discontinuity 
assessment for the programme. 

Fitch has assigned a very low risk or low risk assessment to the asset 
segregation component for most UK covered bonds, because the agency considers it
very unlikely that any claims would reduce the cover pool available to investors
post issuer default. 

The liquidity gap and systemic risk component of the D-Cap is moderate for most 
non-pass-through UK programmes, due to the 12 month extension periods and 
pre-maturity tests in place, which are considered adequate protections for UK 
residential mortgages. As the UK sovereign IDR is 'AAA'/Negative, the rating 
does not act as a constraining factor in this assessment.

The systemic alternative management risk assessment is moderate for all 
non-pass-through UK programmes. Fitch views the significant roles being 
performed post issuer default by the administrator of the limited liability 
partnership that would need to contract other parties to perform important 
functions as a potential negative for the programmes, but the positive effect of
the active oversight taken by the FSA under the UK regulated covered bonds 
framework is also taken into account.

The cover pool-specific alternative management risk assessment is moderate risk 
for the majority of the UK programmes, driven by Fitch's view of the issuer's 
processes, data delivery and IT systems in place. Issuers with market-based 
systems for cover pool management, excellent data provision to Fitch and strong 
experience in covered bonds and securitisation have a low risk assessment. 
Programmes that are considered to be in wind down/dormant are assessed up to two
categories worse, as Fitch believes this may lead to a higher risk of pool 
deterioration.

The risk assessment for privileged derivative ranges from very low to moderate, 
depending on the materiality of the exposure and whether the derivatives are 
provided by external or intra-group counterparties. This component is not the 
sole driver of the D-Cap for any of the listed programmes.

The programmes' D-Caps and risk assessment of the D-Cap components are as 
follows:

Abbey National Treasury Services plc (ANTS;'A'/Stable/'F1')

Mortgage covered bonds: 'AAA'/Stable

D-Cap: 4 (moderate risk)

Asset segregation: very low

Liquidity gap and systemic risk: moderate

Cover pool-specific alternative management: moderate 

Systemic alternative management: moderate

Privileged derivatives: moderate 

Clydesdale Bank Plc - No. 2 programme (regulated programme) (Clydesdale; 
'A'/Stable/'F1')

Mortgage covered bonds: 'AAA'/Stable

D-Cap: 4 (moderate risk)

Asset segregation: very low

Liquidity gap and systemic risk: moderate

Cover pool-specific alternative management: moderate 

Systemic alternative management: moderate

Privileged derivatives: moderate 

HSBC Bank plc (HSBC; 'AA'/Negative/'F1+')

Mortgage covered bonds: 'AAA'/Stable

D-Cap: 4 (moderate risk)

Asset segregation: very low

Liquidity gap and systemic risk: moderate

Cover pool-specific alternative management: moderate 

Systemic alternative management: moderate

Privileged derivatives: moderate 

Royal Bank of Scotland plc (RBS; 'A'/Stable/'F1')

Mortgage covered bonds: 'AAA'/Stable

D-Cap: 4 (moderate risk)

Asset segregation: low

Liquidity gap and systemic risk: moderate

Cover pool-specific alternative management: moderate 

Systemic alternative management: moderate

Privileged derivatives: moderate 

For the ANTS, Clydesdale No. 2, HSBC and RBS programmes, the driver of the D-Cap
is the moderate risk assessment of liquidity gap and systemic risk, cover 
pool-specific and systemic alternative management and privileged derivatives. 
The liquidity gap and systemic risk assessment reflects the agency's view of the
mitigants in place in the form of a three-month interest reserve fund, 12-month 
extension period for the liquidation of the UK residential mortgages, and 
additionally for Abbey, a 12-month pre-maturity test for the hard bullet bonds 
in the programme. 

The rating on a PD basis of Abbey's bonds has changed to 'AA+' from 'AA' driven 
by a D-Cap of 4 and because the AP level Fitch considers in its analysis is also
in line with this rating on a PD basis. 

Bank of Scotland plc (BoS; 'A'/Stable/'F1')

Mortgage covered bonds: 'AAA'/Stable

D-Cap: 3 (moderate high risk)

Asset segregation: low

Liquidity gap and systemic risk: moderate high

Cover pool-specific alternative management: moderate 

Systemic alternative management: moderate

Privileged derivatives: moderate 

Barclays Bank Plc - Residential Mortgage (Barclays; 'A'/Stable/'F1')

Mortgage covered bonds: 'AAA'/Stable

D-Cap: 3 (moderate high risk)

Asset segregation: low

Liquidity gap and systemic risk: moderate high

Cover pool-specific alternative management: low

Systemic alternative management: moderate

Privileged derivatives: moderate

The driver of the D-Caps of 3 for the BoS and Barclays' mortgage programmes is 
the moderate high risk assessment of liquidity gap and systemic risk. This is 
driven by the pre-maturity test, the breach of which leads to an issuer event of
default and a sale of cover assets by the LLP at least six months prior to a 
scheduled covered bond maturity for cover pool asset sales, while Fitch has 
assessed the stressed time to sell residential mortgage cover assets in the UK 
as nine months. The rating for the programmes on a PD basis has changed to 'AA' 
from 'AA+' driven by a D-Cap of 3 and because the AP level Fitch considers in 
its analysis is in line with this rating on a PD basis.

In accordance with Fitch's policies BoS appealed and provided additional 
information to Fitch that resulted in a D-cap component assessment that is 
different than the original rating committee outcome.

Bank of Scotland Plc - Intelligent Finance

Mortgage covered bonds: 'AAA'/Stable

D-Cap: 8 (minimal discontinuity risk)

Asset segregation: low

Liquidity gap and systemic risk: very low

Cover pool-specific alternative management: moderate

Systemic alternative management: very low

Privileged derivatives: low

Barclays Bank Plc - Public Sector

Public sector covered bonds: 'AAA'/Stable

D-Cap: 8 (minimal discontinuity risk)

Asset segregation: moderate

Liquidity gap and systemic risk: very low

Cover pool-specific alternative management: moderate

Systemic alternative management: very low

Privileged derivatives: moderate

Clydesdale Bank Plc - No. 1 programme

Public sector covered bonds: 'AAA'/Stable

D-Cap: 8 (minimal discontinuity risk)

Asset segregation: low

Liquidity gap and systemic risk: very low

Cover pool-specific alternative management: moderate

Systemic alternative management: very low

Privileged derivatives: moderate

The BoS Intelligent Finance, Barclays Public Sector and Clydesdale No. 1 
programmes are pass-through and have a three-month interest reserve and 
therefore, the highest risk of the components does not drive the D-Caps of 8. 
The agency believes that none of the components compromise the overall minimal 
discontinuity assessment for the programme. For the Barclays Public Sector and 
the Clydesdale No. 1 programme, the PD rating has changed to 'AAA' from 'AA', 
driven by a D-Cap of 8 and because the AP level Fitch considers in its analysis 
is also in line with this rating on a PD basis.

Coop

Mortgage covered bonds: 'AAA' on RWN

D-Cap: 4 (moderate risk)

Asset segregation: very low

Liquidity gap and systemic risk: moderate 

Cover pool-specific alternative management: moderate

Systemic alternative management: moderate

Privileged derivatives: very low

The RWN has been maintained due to the IDR being on RWN and now by the cap on 
the covered bond rating, under the updated criteria, to 'AA+', which also 
considers a two-notch recovery uplift.

The driver of the D-Cap is the moderate risk assessment of liquidity gap and 
systemic risk, cover pool-specific and systemic alternative management. The 
liquidity gap assessment reflects the agency's view of the mitigants in the form
of a three-month interest reserve fund and a 12-month extendible maturity for 
the covered bonds. The systemic alternative management score reflects the 
positive effect of the active oversight taken by the FSA under the UK regulated 
covered bonds framework.

Coventry Building Society (CBS; 'A'/Stable/'F1')

Mortgage covered bonds: 'AAA'/Stable 

D-Cap: 4 (moderate risk)

Asset segregation: very low

Liquidity gap and systemic risk: moderate 

Cover pool-specific alternative management: low

Systemic alternative management: moderate

Privileged derivatives: low

Leeds Building Society (LBS; 'A-'/Stable/'F2')

Mortgage covered bonds: 'AAA'/Stable 

D-Cap: 4 (moderate risk)

Asset segregation: very low

Liquidity gap and systemic risk: moderate 

Cover pool-specific alternative management: low

Systemic alternative management: moderate

Privileged derivatives: low

For the CBS and LBS programmes, the driver of the D-Cap is the moderate risk 
assessment of liquidity gap and systemic risk and systemic alternative 
management. The former is driven by the agency's view of the mitigants in the 
form of a three-month interest reserve fund and a 12-month extendible maturity 
on the covered bonds. The systemic alternative management assessment reflects 
the positive effect of the active oversight taken by the FSA under the UK 
regulated covered bonds framework.

The rating on a PD basis of LBS bonds have changed to 'AA' from 'AA+' driven by 
a D-Cap of 4 and because the AP level Fitch considers in its analysis is also in
line with this rating on a PD basis.

Lloyds TSB Bank plc ('A'/Stable/'F1')

Mortgage covered bonds: 'AAA'/Stable 

D-Cap: 4 (moderate risk)

Asset segregation: moderate

Liquidity gap and systemic risk: moderate 

Cover pool-specific alternative management: low

Systemic alternative management: moderate

Privileged derivatives: moderate

The driver of the D-Cap is the moderate risk assessment of asset segregation, 
liquidity gap and systemic risk, systemic alternative management and privileged 
derivatives. The asset segregation is driven by the set-off and bank account 
triggers being inconsistent with Fitch' criteria. The liquidity gap assessment 
reflects the agency's view of the mitigants in the form of a three-month 
interest reserve fund and a 12-month extension on the covered bonds. The 
systemic alternative management score reflects the positive effect of the active
oversight taken by the FSA under the UK regulated covered bonds framework. 
Finally, the privileged derivatives assessment is due to internal interest rate 
swaps being in place that are considered highly material for the programme.

The rating on a PD basis has changed to 'AA+' from 'AA' driven by a D-Cap of 4 
and because the AP level Fitch considers in its analysis is also in line with 
this rating on a PD basis.

Nationwide Building Society (NBS; 'A+'/Negative/'F1')

Mortgage covered bonds: 'AAA'/Stable 

D-Cap: 4 (moderate risk)

Asset segregation: low

Liquidity gap and systemic risk: moderate 

Cover pool-specific alternative management: low

Systemic alternative management: moderate

Privileged derivatives: moderate

YBS

Mortgage covered bonds: 'AAA' on RWN

D-Cap: 4 (moderate risk)

Asset segregation: very low

Liquidity gap and systemic risk: moderate 

Cover pool-specific alternative management: low

Systemic alternative management: moderate

Privileged derivatives: moderate

The RWN for the YBS programme is driven by the cap on the covered bond rating on
a PD basis at 'AA-'. A rating of 'AA+' is still possible because the level of AP
Fitch relies on supports a two-notch recovery uplift.

The driver of the D-Caps of 4 for the NBS and YBS programmes is the moderate 
risk assessment of liquidity gap and systemic risk, systemic alternative 
management and privileged derivatives. The liquidity gap assessment reflects the
agency's view of the mitigants in the form of a three-month interest reserve 
fund and a 12-month extendible maturity on the covered bonds. The systemic 
alternative management score reflects the positive effect of the active 
oversight taken by the FSA under the UK regulated covered bonds framework. 
Finally, the privileged derivatives assessment is due to internal interest rate 
swaps being in place that are considered highly material for the programme.

The rating on a PD basis of NBS's bonds has changed to 'AAA' from 'AA+', driven 
by a D-Cap of 4.

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