OREANDA-NEWS. Fitch Ratings has affirmed National Australia Bank's (NAB, AA-/Stable/F1+) AUD20.3bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable.

The rating action follows the addition of 12-month extendible maturities (soft bullet) to NAB's outstanding benchmark covered bonds after bondholders' consent. The conversion of these bonds, which were originally issued as hard bullet, brings the total amount of soft-bullet bonds to 83.5% of the outstanding covered bonds' balance. The remaining hard-bullet series have scheduled maturity dates up to January 2028.

KEY RATING DRIVERS

The rating is based on NAB's Long-Term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap of 4 notches and the asset percentage (AP) that Fitch relies on in its analysis being the AP used in the programme's asset coverage test at 90%. This provides more protection than Fitch's 'AAA' breakeven AP of 91.5%. The Outlook on the covered bonds reflects the Stable Outlook on NAB's IDR.

The 'AAA' breakeven AP of 91.5% corresponds to a breakeven overcollateralisation (OC) of 9.3%, which is lower than the 11.1% published in March 2016. The change is due to the improvement of the programme's asset and liability mismatches as a result of the hard-bullet bonds considered under the solicitation for consent being converted to soft-bullet with a 12-month extendible maturity. This change reduced the asset disposal loss component to 12.2% from 14.4%. The credit loss component increased to 4% from 3.8% due to higher overall credit risk of the cover pool, which was mainly due to a higher proportion of investment and interest-only loans being included in the cover pool since our last analysis.

The stressed cash flow valuation component reduces the 'AAA' breakeven OC by 5.4%, a lower positive effect than previously, primarily due to Fitch's updated prepayment assumptions for Australia that reduce the excess spread modelled 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-August 2016, the cover pool consisted of 95,037 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD29.2bn. The cover pool's weighted-average loan-to-value ratio was 57.6% and the weighted-average seasoning of the loans was 33.4 months. Investment loans formed 32.1% of the pool while 29.1% of the pool was interest-only loans. The cover pool is geographically diversified across Australia, with the largest concentrations in New South Wales (41.2%) and Victoria (28.2%).

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: National Australia Bank's IDR is downgraded by four notches; the Discontinuity Cap falls by four notches; or the AP that Fitch takes into account in its analysis rises above the 'AAA' breakeven AP of 91.5%.

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, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time.