OREANDA-NEWS. February 02, 2015. Fitch Ratings has affirmed Kiwibank Limited's (KWB; AA/Positive/F1+) NZD191m equivalent outstanding covered bonds at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating is based on KWB's Long-Term Issuer Default Rating (IDR) of 'AA', an unchanged Discontinuity Cap (D-Cap) of 3 (moderate-high risk) and the highest nominal asset percentage (AP) in the last 12 months (60.6%), as KWB's Short-Term IDR is above 'F3'. This provides a large buffer when compared to Fitch's breakeven asset percentage (AP) of 90.0%, supporting a 'AAA' rating after giving credit for recoveries, which is equal to the maximum AP under the programme documentation. The Stable Outlook on the covered bonds' rating is due to the significant buffer against downgrade provided by the issuer's IDR. Since bail-in is not an explicit provision under New Zealand's Open Bank Resolution framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.

The 'AAA' breakeven AP of 90.0%, corresponding to a breakeven overcollateralisation (OC) of 11.1%, is driven by an asset disposal loss component of 14.2% due to the stressed valuation of the entire cover pool after an assumed covered bond default, followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 7.4% due to the longer weighted average life of the assets versus the liabilities and excess spread available under the programme.

Fitch's 'AAA' breakeven OC is lower than the sum of the components, because the agency gives credit for a minimum recovery given default of 91%, rather than 100%, in its 'AAA' scenario. This recovery expectation supports a two-notch uplift from the 'AA' rating which is equal to KWB's IDR. This breakeven AP level is not expected to be sufficient to maintain the current covered bonds rating if the 'AA' IDR is downgraded.

Maturity mismatches remain significant with the weighted average residual life of the assets at 11.2 years (previously 11.3) and the liability at 6.0 years (previously 7.0).

The 4.2% credit loss reflects the impact on the breakeven OC from the weighted average (WA) default rate of 10.1% and the WA recovery rate of 60.0% in a 'AAA' scenario. The credit loss increased since last analysis in January 2014, due to the application of a minimum expected loss of 4% at 'AAA' used in the analysis.

The unchanged D-Cap of 3 reflects Fitch's moderate-high risk assessment of the liquidity gap and systemic risk component. This is driven by the agency's view of the liquidity gap mitigants in the form of a three-month interest reserve fund and 12 month extension period on soft bullet covered bonds. In comparison, Fitch has assessed the time required to sell cover pool assets in New Zealand to be at least 12 months in a stressed market.

For programmes that have not publicly issued for more than two years, Fitch may adjust the cover pool-specific alternative management component of the D-Cap, notably to reflect the risk of overcollateralisation and asset pool quality not being maintained by the issuer. However, the agency has not lowered the D-Cap for this programme, as it believes it is unlikely the issuer will provide less support for this programme. Furthermore, the programme is registered with the Reserve Bank of New Zealand, which in Fitch's view will increase the level of oversight on the programme.