OREANDA-NEWS. March 16, 2015. Fitch Ratings has affirmed The Co-operative Bank plc's (Co-op, B/Negative/B) GBP600m outstanding mortgage covered bond at 'BBB+' with a Negative Outlook.

KEY RATING DRIVERS
The rating is based on Co-op's Long-term Issuer Default Rating (IDR) of 'B', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and an asset percentage (AP) of 77.5% that Fitch takes into account in its analysis, which provides more protection than the 89.5% 'BBB+' breakeven AP. The Negative Outlook on the covered bond rating reflects that on the issuer. Any rating action taken on Co-op's IDR will affect the 'BBB+' covered bond rating.

The overall D-Cap remains unchanged at 4 and the weakest links continue to be the liquidity gap & systemic risk, systemic alternative management and cover pool-specific alternative management. Fitch has revised the privileged derivatives component to low from very low to differentiate between programmes without any privileged derivatives, assessed as very low, and those with external swaps, as is the case for this bond.

Fitch has revised the 'BBB+' breakeven AP to 89.5% from 90.0%. This is to reflect residual commingling risk on the Co-op collection account and the Co-op deposit account, as there is a possibility that the amounts deposited in these accounts exceeds the cash collateral posted with BNP Paribas. The breakeven AP supports a 'BB+' tested rating on a probability of default (PD) basis and a 'BBB+' rating after giving credit for a three-notch recovery.

The 89.5% 'BBB+' breakeven AP, corresponding to a breakeven OC of 11.7% is calculated based on a worst case scenario that assumes an issuer event of default occurs when the bond matures. It results in an asset disposal loss component of 18.8% due to the need to sell assets to meet the bond payment. The 'BBB+' breakeven OC is further increased by the cover pool's credit loss of 1.2%, while the cash flow valuation component leads to a lower 'BBB+' breakeven OC by 7.7% due to the longer weighted average life of the assets versus the liability and the margin earned on the assets.

The 1.2% 'BBB+' credit loss represents the impact on the breakeven OC from the 7.2% weighted average default rate and the 84.2% weighted average recovery rate for the mortgage cover assets in the 'BBB+' scenario. The cover pool is of sound quality and compares well with UK peers.

In its analysis, Fitch relies on an AP of 77.5%, which is used in the asset coverage test released on the programme's investor reports.

RATING SENSITIVITIES
The 'BBB+' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by one or more notches to 'B-' or below; or (ii) the number of notches represented by the D-Cap is reduced to 3 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'BBB+' breakeven level of 89.5%.

The Fitch breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bond, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.

More details on the cover pool and Fitch's analysis will be available in a credit update report, which will shortly be available at www.fitchratings.com.