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Fitch Assigns OCBC's Series 2 Covered Bonds 'AAA'; Outlook Stable
October 6, 2017 / 12:09 AM / 2 months ago

Fitch Assigns OCBC's Series 2 Covered Bonds 'AAA'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/SYDNEY, October 05 (Fitch) Fitch Ratings has assigned Oversea-Chinese Banking Corp's (OCBC; AA-/Stable/F1+) EUR500 million Series 2 mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. This brings OCBC's total outstanding issuance of mortgage covered bonds to EUR1 billion. The fixed-rate bond is due in October 2022 and benefits from a 12-month extendable maturity. KEY RATING DRIVERS The 'AAA' rating is based on OCBC's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift of six notches and a recovery uplift of one notch. In its analysis, Fitch relies on the asset percentage (AP) used in the programme's asset coverage test, which is equal to Fitch's 'AAA' breakeven AP of 86%. This 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 reflects the four-notch buffer against a downgrade of the bank's IDR. The recovery uplift is capped at one notch, as Fitch believes the programme is significantly exposed to foreign-exchange risk from recoveries given default of the covered bonds. This is because the assets are denominated in Singapore dollars, while the covered bonds issued are denominated in euros. Currency risk is hedged on the liabilities, but we expect those hedges to terminate in a recovery scenario. The 'AAA' breakeven AP of 86.0% corresponds to a breakeven overcollateralisation (OC) of 16.3% and is driven by the asset disposal loss of 16.8%. This reflects the significant asset and liability mismatch expected upon issuance from the programme, with a weighted-average life of the cover assets at 10.6 years and the liabilities at 4.8 years. Credit loss contributes 3.4% and the cash flow component reduces OC by 4.2% due to the excess spread modelled by Fitch in the programme. Fitch considered an additional stressed refinancing rate differential of 25bp above Singapore's base mortgage refinance stresses for central provident fund-linked (CPF) loans, as outlined in our APAC Residential Mortgage Rating Criteria. We applied the adjusted refinancing stress on the pro rata value of the linked cover assets. OCBC's refinancing spreads at 'AA+' were adjusted to 251bp from the base rate of 234bp, based on the pro rata value of the CPF-linked loans in the cover pools. This adjustment was made as the CPF-linked loans in the cover pool are subject to potentially higher sales costs because they require CPF board consent or court approval for transfer to a third party. Fitch believes a potential buyer would require compensation for the additional cost in purchasing these loans. Fitch also applied a variation to the APAC Residential Mortgage Rating Criteria, which does not include analytical treatment of asset basis risk. Fitch deems the risk relevant to OCBC's programme enhancement level, as 38.9% of the mortgage assets are linked to floating rate market-linked indices, being the one-month and three-month Singapore Inter Bank Offer Rate (SIBOR) and the three-month Singapore Offer Rate (SOR), all of which reset at regular intervals. Fitch bases its assumption on the three-month SOR, as this is the index used for the liability swaps on the issued covered bonds. We deduct 29bp from total cash flow of the mortgages linked to the SIBOR based on our analysis of the historical rate movement of the linked market indices over a period of 17 years. There is no rating impact from this criteria variation. RATING SENSITIVITIES Oversea-Chinese Banking Corp's covered bonds would be vulnerable to downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 86% or if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB+'. If the AP in the programme rises to the maximum 97% contractual AP stipulated in the programme documents, which is slightly more than the minimum stipulated by the Monetary Authority of Singapore, the rating on the programme would be downgraded to 'AA', one notch above the issuer's IDR. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other factors, 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 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. Contact: Primary Analyst Keum Hee Oh Director +82 2 3278 8373 Fitch Australia Pty Ltd, Korea Branch 9F, 97Uisadang dae-ro Youngdeungpo-Gu Seoul, 150-737, Republic of South Korea Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Natasha Vojvodic Senior Director +61 2 8256 0350 The source of information used to assess these ratings was Oversea-Chinese Banking Corp. 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; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 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 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. 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 WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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