December 8, 2016 / 2:03 AM / a year ago

Fitch Rates NAB's Series 28 USD1bn Covered Bonds 'AAA'/Stable

(The following statement was released by the rating agency) SYDNEY, December 07 (Fitch) Fitch Ratings has assigned National Australia Bank Limited's (NAB, AA-/Stable/F1+) Series 28 USD1bn mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance to AUD22.4bn. The fixed-rate bond is due in December 2021 and benefits from a 12-month extendable maturity. KEY RATING DRIVERS The rating is based on NAB's Long-Term Issuer Default Rating (IDR) of 'AA-', an Issuer Default Rating (IDR) uplift of zero notches, a payment continuity uplift (PCU) of six notches, a recovery uplift of one-notch and an asset percentage (AP) of 91.5%. The AP is used in the programme's asset coverage test, is relied on by Fitch in its analysis and is equal to the agency's 'AAA' breakeven AP. The 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 on the covered bonds reflects the four-notch buffer against a downgrade of the bank's IDR. The 'AAA' breakeven AP of 91.5%, corresponding to a breakeven overcollateralisation of 9.3%, is driven by an asset disposal loss component of 13.2%. This has increased from 11.4% due to the new issuance increasing liability concentration due in 2021. This has increased the amount of assets modelled by Fitch to be sold to cover the larger value of maturities following a switch of recourse to the cover pool. The cash flow valuation component decreases the OC by 7.3%, which is up from 5.5%, due to an improved level of excess spread modelled by Fitch in the programme as a result of the new issuance. The credit loss component remains stable at 3.4%. The weighted-average residual life of the cover assets is 16.1 years and 4.5 years for liabilities. The rating's recovery uplift is capped at one notch, as foreign-exchange risk could have a material impact on recoveries given a default of the covered bonds. This is because the cover assets are denominated in Australian dollars while 96.6% of the covered bonds outstanding are denominated in other currencies. Although there are swaps in place on the liabilities, we expect those swaps to terminate upon a covered bond default. This would mean the longer-dated Australian dollar asset cash flows would provide recoveries in a different currency than the majority of covered bonds. RATING SENSITIVITIES National Australia Bank Limited's covered bonds would be vulnerable to a downgrade if the relied upon asset percentage (AP) rises above the 'AAA' breakeven AP of 91.5% or if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB+'. If the AP in the programme rises to the maximum 95.0% 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 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 Natasha Vojvodic Senior Director +61 2 8256 0350 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com The source of information used to assess these ratings was National Australia Bank Limited. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Applicable Criteria APAC Residential Mortgage Criteria (pub. 30 Aug 2016) here Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016) here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Fitch's Cover Asset Refinancing Spread Level (RSL) Assumptions - Excel File (pub. 26 Oct 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Criteria for Lenders' Mortgage Insurance in RMBS (pub. 28 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016085 Solicitation Status here 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. 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