OREANDA-NEWS. Fitch Ratings has affirmed Suncorp-Metway Limited's (SML; A+/Stable/F1) AUD2.65bn of outstanding mortgage covered bonds at 'AAA' with a Stable Outlook.

KEY RATING DRIVERS
The rating is based on SML's Long-Term Issuer Default Rating (IDR) of 'A+', an unchanged Discontinuity Cap (D-Cap) of 3; and an asset percentage (AP) of 84.75%, which is lower than Fitch's breakeven AP for a 'AAA' rating of 89.5%, supporting a 'AA' tested rating on a probability of default (PD) basis and a 'AAA' rating after giving credit for recoveries. The Outlook on the covered bonds' reflects the Stable Outlook on SML's IDR.

The 'AAA' breakeven AP of 89.5%, corresponding to a breakeven overcollateralisation (OC) of 11.7% is driven by the asset disposal loss component of 18.1% due to the asset and liability maturity mismatches in the programme and the refinancing assumptions applied to Australian residential mortgages, followed by the cover pool's credit loss of 2.8% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 3.9% due to the longer weighted average life of the assets versus the liabilities and excess spread available under the programme. The 'AAA' breakeven AP has not changed since the last analysis in November 2014.

Maturity mismatches in the programme are significant. The weighted-average residual life of the assets has decreased from 14.5 to 14.0 years, since last analysis, the liabilities also decreased from 3.5 years to 3.1 years.

As of end-March 2015, the cover pool consisted of 15,401 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD3.4bn.

RATING SENSITVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) SML's IDR was downgraded by two notches to 'A-'; (ii) the D-Cap fell by two or more categories; or (iii) the AP that Fitch takes into account in its analysis, increased above Fitch's 'AAA' breakeven AP of 89.5%.

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 the 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.

In a deviation from its APAC Residential Mortgage Criteria, the agency used a delinquency multiple of 2x on the WA frequency of foreclosure: 8.9% at the tested rating on a PD basis of 'AA' in its cash flow modelling of the asset cash flows to stress the level of loans falling delinquent over a period of time, then curing thereafter.