OREANDA-NEWS. Fitch Ratings has assigned F. Van Lanschot Bankiers N.V.'s (FvL; A-/Negative/F2/a-) Series 02 covered bonds a 'AAA(EXP)' rating with a Stable Outlook. The fixed-rate bond is the first in benchmark size to be issued under the conditional pass-through covered bond programme. The expected rating is based on a hypothetical issuance of up to EUR500m with a five-year maturity.

The assignment of the final rating is contingent on the receipt of final documents conforming to information already reviewed.

KEY RATING DRIVERS
The rating is based on FvL's Long-term Issuer Default Rating (IDR) of 'A-', a Discontinuity Cap (D-Cap) of 8 (minimal discontinuity), a newly assigned IDR uplift of 1 and the 11.1% overcollateralisation (OC) that Fitch takes into account in its analysis. The breakeven asset percentage (AP) for the 'AAA(EXP)' rating is 90%, same as the level of AP that FvL uses in its asset cover test. The 'AAA' breakeven AP supports a 'AA' rating on a probability of default (PD) basis and allows for a two-notch recovery uplift for the covered bonds in a 'AAA' scenario. Since the programme has been registered with the Dutch central bank (DNB) Fitch expects the covered bonds to be exempt from bail-in and gives benefit to FvL's level of senior unsecured debt being above 5%, leading to an IDR uplift of 1.

The D-Cap of 8 is driven by what Fitch assesses as minimal discontinuity of the liquidity gap and systemic risk component. This is due to the pass-through structure and the three-month interest reserve, including senior costs in place for the bonds. It is Fitch's view that none of the other D-Cap components compromise the overall minimal discontinuity assessment for the programme.

The 90% 'AAA' breakeven AP is equivalent to a breakeven OC of 11.1%. Due to the pass-through nature of the programme, the credit loss of 10.3% in a 'AAA' scenario is the key driver of the 'AAA' breakeven OC. This reflects the impact of the weighted average (WA) default rate of 19.3% and the WA recovery rate of 51.4% in a 'AAA' scenario. The 'AAA' breakeven AP also takes into account the unhedged nature of the programme and adjustments made for insurance set-off risk and commingling risk.

The cover pool credit risk is higher than in other Dutch mortgage covered bond programmes but is in line with previous RMBS transactions by FvL. About 70% of the mortgages are interest-only, which are assumed to carry a higher risk of default. In addition, Fitch did not receive any income information on the borrowers and assumed a conservative debt-to-income-ratio of 35% for all borrowers. Fitch has also adjusted upwards the default probability for borrowers with multiple properties. FvL mainly targets affluent borrowers, therefore at EUR665,271, the average indexed property value in the pool is higher than average. The pool is well-seasoned (10 years) and represents mainly loans originated by FvL, with a small portion of loans originated by C&E Bankiers.

The 'AAA' breakeven OC is further driven by the asset disposal loss component of 4.2%, which is due to the negative carry calculated in a high prepayment scenario. The excess spread under the programme has a positive impact on the cash flow valuation, reducing the 'AAA' breakeven OC by 0.5%.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) FvL's IDR is downgraded by six notches or more to 'BB-' or lower (ii) the total number of notches represented by the IDR uplift and the D-Cap is reduced to four or lower; or (iii) the AP that Fitch takes into account in its analysis increases above Fitch's 'AAA' breakeven AP of 90%.

The Fitch breakeven AP for the covered bonds' 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 breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.