OREANDA-NEWS. Fitch Ratings has assigned Suncorp-Metway Limited's (SML, A+/Stable/F1) Series 2016-2 AUD350m mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. The fixed-rate bond is due in August 2026 and benefits from a 12-month extendable maturity.

KEY RATING DRIVERS

The rating is based on SML's Long-Term Issuer-Default Rating (IDR) of 'A+', a discontinuity cap of 4 notches and the asset percentage (AP) Fitch relies on in its analysis being the AP used in the asset coverage test (89.29%). This provides more protection than Fitch's unchanged 'AAA' breakeven AP of 91%. The Outlook on the covered bonds' reflects the Stable Outlook on SML's IDR.

The 'AAA' breakeven AP of 91% corresponding to a breakeven overcollateralisation (OC) of 9.9% is driven by the asset disposal loss component of 18%, due to the programme's large maturity mismatches, with the cover assets having a weighted-average life of approximately 14 years and the covered bonds' of three years.

The credit loss is 3.2% and the cash flow valuation component reduces the 'AAA' breakeven OC by 9.7%, reflecting the excess spread modelled by Fitch for the programme. The breakeven AP considers whether timely payments are met in a 'AA' scenario and tests for recoveries given default of at least 91% in a 'AAA' scenario.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) Suncorp-Metway Limited's Issuer Default Rating was downgraded by three notches to 'BBB+'; (ii) the discontinuity cap fell by 3 notches to 1 (Very High); or (iii) the asset percentage (AP) Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 91%.

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.