OREANDA-NEWS. Fitch Ratings has affirmed ANZ Bank New Zealand Limited's (ANZNZ, AA-/Stable/F1+) NZD4.79bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. The covered bonds are issued through ANZ New Zealand (Int'l) Limited, a guaranteed issuing vehicle used for international funding by ANZNZ.

Fitch has also revised the discontinuity-cap (D-Cap) to 3 notches (Moderate High Risk) from 2 notches (High Risk). This is because Fitch no longer considers the outstanding hard-bullet bonds material to the assessment of the liquidity gap and systematic risk component, which drives the D-Cap. The agency expects the remaining outstanding hard-bullet bonds due to mature over the next 18 months to be repaid by ANZNZ.

Previously, the assessment was constrained by the hard-bullet bond's pre-maturity test having a six-month cure period, which limits the covered bond guarantor's ability to make timely payments following an issuer event of default. The revised component assessment is supported by a 12-month extension on the outstanding soft-bullet bonds. Fitch believes this improves liquidity protection for timely payment to covered bond holders should recourse switch to the cover pool.

KEY RATING DRIVERS

The rating is based on ANZNZ's Long-Term Issuer-Default Rating (IDR) of 'AA-', a revised D-Cap of 3 notches and the highest nominal asset percentage (AP) in the last 12 months (71.3%). This AP is lower than Fitch's 'AAA' breakeven AP of 89% and supports a 'AA'-tested rating on a probability-of-default (PD) basis and a 'AAA' rating after giving credit for recoveries. The Outlook on the covered bonds reflects the Stable Outlook on ANZNZ's IDR.

The D-Cap of 3 notches reflects the moderate high risk assessment of the liquidity gap and systemic risk component. The assessment is driven by the 12-month extension period on the issued soft-bullet bonds and the three-month reserve that will be funded on the loss of the Short-Term Rating of 'F1+'. The other four D-Cap components assessed by Fitch remain unchanged.

The 'AAA' breakeven AP of 89%, which equates to a breakeven over-collateralisation of 12.4%, has changed from the last analysis after Fitch fine-tuned its approach to modelling the pro-rata asset sales clause, which used to restrict the sale of assets in the programme after an issuer event of default and bond extension periods.

The breakeven over-collateralisation of 12.4% is driven by an asset disposal loss component of 15.2%, which reflects the significant maturity mismatches modelled in the programme, with the weighted average residual life of the assets at 12.4 years and the liabilities at 2.3 years. The credit loss component contributes 5.2%, which has increased due to the slight deterioration of the credit quality of the cover pool, while the stressed cash flow valuation component decreases the breakeven over-collateralisation by 6.2%, due to excess spread modelled by Fitch for the programme.

As of 30 June 2016, the cover pool consisted of 60,418 loans secured by first-ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD10.8bn. The cover pool's weighted average loan-to-value ratio was 54.9% and the weighted average seasoning of the loans was 27.3 months. The cover pool includes loans linked to flexi loans (an at-call secured line of credit) and short-dated bullet loans, which in Fitch's opinion, increases the credit risk of the portfolio.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: ANZ Bank New Zealand Limited 's IDR is downgraded by three notches; the D-Cap falls by three notches; or the AP that Fitch takes into account in our analysis rises above the 'AAA' breakeven AP of 89%.

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.