OREANDA-NEWS. Fitch Ratings says there is no rating impact on Bank of Scotland Plc's (BoS; A+/Stable/F1/a) mortgage covered bonds (AAA/Stable) from the potential introduction of a 12-month extendible maturity to certain series of its covered bonds. The proposed change is contingent on investor approval.

BoS is seeking investor consent for the implementation of a 12-month extendible maturity (soft bullet) for seven of the eight outstanding covered bonds series issued with fixed maturity dates (hard bullet), constituting 84% of the outstanding covered bonds balance. The remaining USD-denominated bond (Series 21) is not part of the consent solicitation.

In Fitch's view, the proposed change would constitute an effective mitigant against liquidity gaps in the programme. Extendible maturities create a period during which liquidity can be raised from the cover pool should the cover pool becoming the sole source of payment. The proposed maturity extension provides a comparable level of protection against liquidity risk as the current liquidity provision in the form of a 12 month pre-maturity test.

The current Discontinuity Cap (D-Cap) would remain unchanged at '4' (moderate risk). It reflects the unchanged moderate risk assessment for the liquidity gap and systemic risk, alternative management and privileged derivatives components, while asset segregation remains very low risk.

Fitch notes that the changes could positively impact the 'AAA' break-even asset percentage for covered bond programme due to the extendible maturities. Fitch will conduct a full analysis as and when the amendments are put in place.

Fitch does not view this planned modification of the bonds' terms and conditions as a default or distressed debt exchange (see 'Distressed Debt Exchange' dated 30 June 2014 at www.fitchratings.com). This is because the new provisions are not aimed at preventing an imminent default of any covered bond issuer and will only be implemented if they are approved by three-quarters of the votes cast by the required quorum.

At present, more than half of covered bonds programmes rated by Fitch include extendible maturities, with the 12-month extension the most common. The maturity characteristics of all programmes publicly rated by Fitch can be found in the Covered Bonds Surveillance Snapshot, dated 1 May 2015 on www.fitchratings.com.