OREANDA-NEWS. Fitch has revised the liquidity gap and systemic risk component of its discontinuity risk (D-Cap) analysis to 'Moderate' (D-Cap of '4') from 'Moderate High' (D-Cap of '3') for a typical Australian covered bond programme, secured by prime Australian residential mortgages. This applies to mortgage programmes with liquidity protection in the form of a 12 month maturity extension on soft bullet bonds and a pre-maturity test with a cure period of up to 12 months for issued hard bullet bonds.

The amendment to Fitch's mortgage liquidity assessment is supported by the increased size of the Australian covered bond market, the continued use of covered bonds by issuing banks for funding and the refinancing of existing covered bonds. In Fitch's view, this demonstrates willingness by the issuers to maintain current issuance profiles and market liquidity of the covered bond product. Mortgage liquidity is also enhanced by a long-standing securitisation market in Australia which has seen a resurgence of issuance in the past 12-18 months.

As the weak link in the D-Cap assessment for Australian programmes is the liquidity gap and systemic risk component, the D-Cap assigned to the programmes will improve by one category. Programmes with outstanding hard bullet covered bonds subject to a cure period of up to six months under the pre-maturity test, post an issuer default, will still retain a one-notch difference in the liquidity gap and systemic risk assessment compared to programmes with better liquidity provisions and which equates to a 'Moderate high' (D-Cap of '3') assessment.

The revision in D-Cap has no impact on the ratings of Australian mortgage programmes as outstanding covered bonds are already rated 'AAA'. The increase in the D-Cap will provide an additional one-notch buffer against a potential downgrade of the covered bonds rating.

The revised D-Caps are as follows:

Australia and New Zealand Banking Group Limited

D-Cap: revised to '3' (Moderate high) from '2' (High)

Commonwealth Bank of Australia

D-Cap: revised to '3' (Moderate high) from '2' (High)

National Australia Bank Limited


D-Cap: revised to '4' (Moderate) from '3' (Moderate high)

Suncorp-Metway Limited

D-Cap: revised to '4' (Moderate) from '3' (Moderate high)

Westpac Banking Corporation

D-Cap: revised to '3' (Moderate high) from '2' (High)