(The following statement was released by the rating agency)
March 14 - Fitch Ratings has assigned Commonwealth Bank of Australia’s (CBA, ‘AA-'/Stable/‘F1+') CHF425m three-year and CHF350m 7.5-year hard bullet residential mortgage covered bonds ‘AAA’ ratings. The bonds are guaranteed by Perpetual Corporate Trust as trustee of the CBA Covered Bond Trust. Under this programme CBA can periodically issue covered bonds up to USD30bn secured on a dynamic pool of first-ranking Australian residential mortgage loans.
The ratings are based on CBA’s Long-Term Issuer Default Rating of ‘AA-’ and a Discontinuity Factor (D-Factor) of 29.9%, the combination of which enables the covered bonds to reach a ‘AA+’ rating on a probability of default basis (PD) and a rating of ‘AAA’ after factoring in a rating uplift from cover pool recoveries which have been modelled on a ‘AAA’ rating scenario. The programme’s contractual asset percentage (AP) of 81.8%, equivalent to a minimum overcollateralisation of 22.2%, is equal to the AP supporting the ‘AAA’ rating. The level of AP supporting the 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, and it cannot be assumed that it will remain stable over time.
Fitch’s D-Factors measure the likelihood of the interruption of payments on the covered bonds at the time of a default by their issuer, on a scale between 0% and 100%, with 0% reflecting perfect continuity and 100% equivalent to a simultaneous default of the issuer and its covered bonds.
The D-Factor of 29.9% reflects the strength of the asset segregation through a bankruptcy remote SPV, which acts as guarantor of the covered bonds. It also reflects the mitigant to liquidity gap risk in the form of a pre-maturity test, triggering the cash collateralisation of payments due over the next 12 months upon a downgrade of the issuer below ‘F1+', or for future soft bullet issues, a 12-month maturity extension and a cash reserve covering three months of payments due on the covered bonds. It further factors in the provision for the guarantor to take decisions after issuer default, aided by the adequate quality of the issuer’s IT systems; and the oversight of the issuer under covered bond legislation recently enacted in Australia. All else being equal, the rating of CBA’s mortgage covered bonds could still be maintained at ‘AAA’ if the issuer is rated at least ‘A’.
As of 6 March 2012, the cover pool consisted of 63,695 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD16,295m. The portfolio is wholly made up of full documentation loans which have a weighted average current loan-to-value ratio of 61.1%, and a weighted average seasoning of 31 months. Floating-rate loans comprise 91.2% of the cover pool. In a ‘AAA’ scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 9.8%, and a weighted average recovery rate of 60.8%. The cover pool is geographically distributed across Australia’s states, with the largest concentrations being in New South Wales (33.3%) and Victoria (39.3%). The agency’s mortgage default analysis is based on its Australian residential mortgage criteria.
Fitch has formed assumptions about the default probability and losses of the cover pools under a ‘AAA’ stress scenario, and tested maturity mismatches between the cover pools and possible covered bond issuance in a wind-down scenario under the management of a third party.