OREANDA-NEWS. Fitch Ratings has affirmed KBC Bank's (A-/Stable) EUR6.81bn mortgage pandbrieven at 'AAA', following the issuance of a new series (series 12) under the programme and the addition of assets to the cover pool. The Outlook is Stable.

KEY RATING DRIVERS

The rating is based on KBC Bank's Long-term Issuer Default Rating (IDR) of 'A-', an unchanged IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the 36.6% OC that Fitch takes into account in its analysis (after the issuance of the new series 12), which provides more protection than the 20.0% 'AAA' breakeven OC.

The Stable Outlook on the pandbrieven rating reflects of the Stable Outlook on KBC Bank's IDR, as well as Fitch's stable outlook for the underlying Belgian residential loan assets.

Fitch has updated its breakeven overcollateralisation (OC) for the 'AAA' rating to 20.0% (from 22.0% previously). The shorter weighted average (WA) life of the assets (9.4 years compared with 9.7 years previously) reduces the maturity mismatches between the assets and the liabilities (5.1 years WA maturity). Under the stressed scenarios considered in Fitch's cash flow analysis for the programme, the WA life of the assets remains higher than that of the liabilities.

The 'AAA' breakeven OC of 20.0% is driven by the cover pool's cash flow valuation of 11.4% in a 'AAA' scenario (compared with 13.0% previously). This reflects the unhedged fixed assets and liabilities positions of the programme, resulting in smaller net present value of the assets than that of the covered bonds in an upward interest rate stress scenario, although this is partially mitigated by a smaller maturity gap between the assets versus the liabilities following the issuance of the new pandbrief series. The cover pool's credit loss remains unchanged at 7.5% in a 'AAA' scenario. The asset disposal loss is 4.5% (compared with 5.3% previously), reflecting the reduced maturity mismatches between the assets and the liabilities in a 'AA' rating scenario. The breakeven OC considers whether timely payments are met in a 'AA' scenario and tests for recoveries given default of at least 91% in a 'AAA' scenario.

The unchanged IDR uplift of 2 reflects the covered bonds' exemption from bail-in, that the issuer is systemically important in its domestic market (so that Fitch considers that resolution by other means than liquidation is likely) and that there is protection provided by senior unsecured debt that is in excess of 5% of total adjusted assets.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to a downgrade if any of the following occurs: (i) KBC's IDR is downgraded by three notches to 'BBB-' or lower; (ii) the number of notches represented by the D-Cap and the IDR uplift is reduced to three or below; (iii) the OC that Fitch considers in its analysis decreases below Fitch's 'AAA' breakeven level of 20.0%.

Fitch's breakeven OC for the pandbrieven rating will be affected, among others, by the profile of the cover assets relative to outstanding pandbrieven, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the pandbrieven rating cannot be assumed to remain stable over time.

More details on the cover pool and Fitch's analysis are available in a full rating report, available at www.fitchratings.com.

In the report 'Breaking Down Breakeven Overcollateralisation', dated 8 July 2014, Fitch details its approach for determining the breakeven OC components.