OREANDA-NEWS. Fitch Ratings has assigned Commonwealth Bank of Australia's (CBA, AA-/Stable/F1+) Series 56 EUR1.25bn mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. The fixed-rate bond is due in July 2026 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-', a discontinuity cap (D-Cap) of 4 notches and the asset percentage (AP) that Fitch relies on in its analysis being the AP used in the asset coverage test (89.5%), which provides more protection than Fitch's 'AAA' breakeven AP of 90.5%. The Outlook on the covered bonds' reflects the Stable Outlook on CBA's IDR.

The 'AAA' breakeven AP of 90.5% corresponding to a breakeven overcollateralisation (OC) of 10.5% is driven by the asset disposal loss component of 11.6%, due to the large maturity mismatches in the programme, with the cover assets having a weighted average life of 15.2 years and the covered bonds' of 5 years, and the impact of the programme's pro-rata asset sales clause, which is used to restrict the sale of assets after an issuer event of default. The credit loss component remained at 3.6%.

The cash flow valuation component reduces the 'AAA' breakeven OC by 3.6%, a lower positive impact than previously, due to the slightly decreased excess spread modelled by Fitch for the programme. The breakeven AP considers whether timely payments are met in an 'AA' scenario and tests for recoveries given default of at least 91% in an 'AAA' scenario.

As of end-June 2016, the cover pool consisted of 141,814 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD30.9bn. The cover pool's weighted average LVR is 57% and the weighted average seasoning of the loans is 53 months. Loans covered by lenders' mortgage insurance equated to 15.4% of the pool by balance.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) Commonwealth Bank of Australia's Issuer Default Rating was downgraded by four notches to 'BBB+'; (ii) the discontinuity cap fell by four notches to 0 (full discontinuity); or (iii) the asset percentage (AP) Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 90.5%.

Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other things, by the profile of the cover assets relative to outstanding covered bonds, which can change even in the absence of new issuance. This means the 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.