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Fitch Affirms Royal Bank of Scotland's Covered Bonds at 'AAA'; Outlook Stable
September 18, 2014 / 4:12 PM / 3 years ago

Fitch Affirms Royal Bank of Scotland's Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 18 (Fitch) Fitch Ratings has affirmed Royal Bank of Scotland PLC's (RBS, A/Negative/F1/bbb) GBP7.2bn equivalent outstanding covered bonds issued out of the EUR25bn Global Covered Bond Programme at 'AAA'. The Outlook is Stable. The rating action follows the annual review of the programme. KEY RATING DRIVERS The covered bonds' rating is based on RBS's Long-term Issuer Default Rating (IDR) of 'A', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the 74.4% asset percentage (AP) used in the programme's asset coverage test that Fitch takes into account in its analysis and which provides more protection than the 89% 'AAA' breakeven AP. The 'AAA' breakeven AP has been increased from 85.5% in September 2013 due to a lower credit loss and better cash flow valuation. The Stable Outlook on the covered bonds' rating reflects that the six-notch uplift resulting from the IDR uplift and the D-Cap would be sufficient to absorb a potential downgrade of RBS's IDR to the level of its Viability Rating (bbb). The 89% 'AAA' breakeven AP, corresponding to a breakeven OC of 12.4% is driven by the asset disposal loss component of 12.3% due to large maturity mismatches between assets and liabilities with a weighted average life, WAL of 12.2 (assuming no prepayment) and 4.1 years, respectively, followed by the cover pool's credit loss of 6.0% in a 'AAA' scenario. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 3.7% due to the much longer WAL of assets than liabilities. The rating considers both an uplift on a probability of default basis and for recoveries given default. The asset disposal loss component is in line with the rating scenario that is tested for timely payments (i.e. 'AA' tested rating on a PD basis), while the other breakeven OC components represent 'AAA' stresses. Combined with Fitch's testing for at least 91% recoveries rather than 100% to assign two notches credit for recoveries given default, this is why the sum of the breakeven OC drivers is higher than the 'AAA' breakeven OC. The 'AAA' credit loss for the residential mortgage asset pool is 5.7% (as a percentage of assets), resulting from the 17.0% weighted average (WA) default rate and the 65% WA recovery rate for the residential mortgage cover assets in a 'AAA' scenario. The 'AAA' credit loss is lower than the average of 12 Fitch-rated 'AAA' UK covered bond programmes as a result of the lower indexed current loan-to-value ratio and the lower proportion of interest-only loans. The unchanged D-Cap of 4 is due to the weak link assessment of a moderate risk assessment for four components out of five with the exception of asset segregation, which has a low risk assessment. The unchanged IDR uplift of 2 reflects that the issuer is a global systemically important financial institution so that Fitch considers that resolution by other means than liquidation is likely and there is protection provided by senior unsecured debt in excess of 5% of total adjusted assets. RATING SENSITIVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) RBS's IDR is downgraded by four or more notches to 'BBB-' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 4 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 89%. The Fitch breakeven AP for the covered bonds' rating will be affected, amongst 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. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the cover pool and Fitch's analysis will be available in a full rating report, which will shortly be available at In the report 'Breaking Down Breakeven Overcollateralisation', dated 8 July 2014, Fitch details its approach for determining the breakeven OC components. Contact: Primary Analyst Kate Lin Director +44 20 3530 1706 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Kevin Vanistendael Analyst +44 20 3530 1564 Committee Chairperson Cosme de Montpellier Senior Director +44 20 3530 1407 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available on Applicable criteria: 'Covered Bonds Rating Criteria', dated 8 August 2014; 'Counterparty Criteria for Structured Finance and Covered Bonds' and 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', both dated 14 May 2014; 'EMEA RMBS Master Rating Criteria', dated 28 May 2014; 'Criteria Addendum - UK Mortgage Loss and Cash Flow Assumptions', dated 30 May 2014 and 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds', dated 23 January 2014, are available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here EMEA RMBS Master Rating Criteria here Criteria Addendum: UK - Residential Mortgage Loss and Cash Flow Assumptions here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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