OREANDA-NEWS. Fitch Ratings has assigned Westpac Banking Corporation's (WBC, AA-/Stable/F1+) Series 2015-C5 EUR1bn mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance to AUD25.6bn. The fixed-rate bond is due in July 2021, and benefits from a 12-month extendable maturity.

KEY RATING DRIVERS
The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 (moderate high), and an asset percentage (AP) of 89.0%, which provides a small buffer to Fitch's break-even AP of 89.5%. This supports a tested rating of 'AA' 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 WBC's IDR.

The 'AAA' break-even AP of 89.5%, corresponding to a break-even overcollateralisation (OC) of 11.7%, is driven by the asset disposal loss component of 15.2%. This is down from 16.6% due to an improvement of the asset and liability mismatch as the result of the recent maturity on 17 July of AUD1.96bn of bonds, and the new issuance having a longer tenor. This is followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario. The cash-flow valuation component reduces the 'AAA' break-even OC by 6.7%. This is due to the longer weighted-average life of the assets versus the outstanding liabilities and the excess spread available under the programme.

Maturity mismatches are significant, with the weighted-average residual life of the assets at 15.4 and the liabilities at 3.7 years.

Fitch, in a deviation from our APAC Residential Mortgage Criteria, used a delinquency multiple of 2x on the WA frequency of foreclosure of 7.3% at the tested rating ('AA') on a PD basis. In our cash-flow modelling of the asset cash flows, this multiple stresses the level of loans falling delinquent in the cover pool over a period of time, curing thereafter.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: WBC's IDR is downgraded by three notches; the D-Cap falls by more than two categories; or the AP that Fitch takes into account in our analysis rises above the 'AAA' break-even 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' break-even AP to maintain the covered bond rating can not be assumed to remain stable over time.