OREANDA-NEWS. Fitch Ratings has assigned Bank of New Zealand Limited's (BNZ, AA-/Stable/F1+) Series 9 EUR750m mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. The fixed-rate bond is due in June 2021, and benefits from a 12-month extendable maturity.

Series 9 is issued by BNZ International Funding Ltd (BNZIF), a guaranteed issuing vehicle used for international funding by BNZ. This brings the total outstanding issuance from the programme to NZD4.2bn, with offshore issuance through BNZIF accounting for 71.2% of total issuance.

KEY RATING DRIVERS

The rating is based on BNZ's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 notches (moderate high), and the asset percentage (AP) relied upon in Fitch's analysis of 84.4%, which is the highest nominal AP over the past 12 months and provides a small buffer of protection compared to Fitch's breakeven AP of 87%. The Outlook on the covered bonds reflects the Stable Outlook on BNZ's IDR.

The 'AAA' breakeven AP has increased to 87% from 86.5% published on 2 February 2016 in the rating action commentary for BNZ's previous covered bond issue. The 'AAA' breakeven AP of 87% corresponds to a breakeven overcollateralisation (OC) of 14.9%. The asset disposal loss component of 20.4% remains the main driver of the 'AAA' breakeven OC. It reflects the impact of maturity mismatches between assets and liabilities, as well as the effect of the pro-rata sales clause in the programme, which limits the amount of assets that can be sold for any one bond.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: BNZ's IDR is downgraded by three notches; the D-Cap falls by more than three notches; or the AP that Fitch takes into account in our analysis rises above the 'AAA' breakeven AP of 87%.

Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among 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 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.