April 12, 2017 / 6:00 AM / 5 months ago

Fitch Rates CBA's EUR750m Covered Bonds 'AAA'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, April 12 (Fitch) Fitch Ratings has assigned Commonwealth Bank of Australia's (CBA, AA-/Stable/F1+) Series 62 EUR750 million mortgage covered bonds ratings of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance of covered bonds to AUD23.3 billion. Series 62 is a fixed-rate bond due in April 2024 and benefits from a 12-month extendable maturity. KEY RATING DRIVERS The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift of six notches, a recovery uplift (RU) of one notch and the asset percentage (AP) of 92% used in the programme's asset coverage test, which Fitch relies upon in its analysis. This AP is equal to Fitch's 'AAA' breakeven AP and 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 Outlook on the covered bonds reflects the four-notch buffer against the downgrade of the issuer's IDR. The 'AAA' breakeven AP of 92%, corresponding to a breakeven overcollateralisation (OC) of 8.7%, is driven by an asset disposal loss component of 11.8%, reflecting the asset and liability mismatches in the programme with the weighted-average residual life of the cover assets at 15.2 years and the liabilities at 5.9 years. The credit loss component is 3.1% and the cash flow valuation component decreases the OC by 6.2%, reflecting the excess spread modelled by Fitch in the programme. The RU on the rating is capped at one notch, as the programme is exposed to foreign-exchange risk from recoveries given default of the covered bonds. This is because the assets are denominated in Australian dollars while 89% of the covered bonds outstanding are denominated in other currencies. Swaps are in place on the liabilities, but we expect those swaps to terminate in a recovery scenario. RATING SENSITIVITIES Commonwealth Bank of Australia's covered bonds would be vulnerable to downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 92% or if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB+'. If the AP in the programme rises to the maximum 95% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA', one notch above the 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 the 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 Analyst +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 The source of information used to assess these ratings was Commonwealth Bank of Australia. 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 Criteria (pub. 30 Aug 2016) 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 Global Criteria for Lenders’ Mortgage Insurance in RMBS (pub. 28 Jul 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 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. 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