OREANDA-NEWS. Fitch Ratings has assigned Commonwealth Bank of Australia's (CBA, AA-/Stable/F1+) Series 44 USD1bn mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance to AUD23.9bn. The fixed-rate bond is due in July 2020 and benefits from a 12-month extendable maturity.

KEY RATING DRIVERS
The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 (moderate high) and an asset percentage (AP) of 89.5%, which equals Fitch's breakeven AP of 89.5%, supporting 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 CBA'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 13.9% due to maturity mismatches arising from the programme and the refinancing assumptions applied to Australian residential mortgages. This is followed by the cover pool's credit loss of 3.6% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 5.0% due to the longer weighted average (WA) life of the assets versus the outstanding liabilities and the excess spread available under the programme.

Maturity mismatches are significant, with the WA residual life of the assets at 15.0 and the liabilities at 4.4 years. As of 30 June 2015, the cover pool consisted of 133,041 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD29.0bn. Fitch's calculated 'AAA' expected loss is 3.4% on the residential mortgage assets, which benefits from credit to lenders mortgage insurance.

In a deviation from its APAC Residential Mortgage Criteria, the agency used a delinquency multiple of 2x on the WA frequency of foreclosure of 8.1% at the tested rating ('AA') on a PD basis. In its 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 downgrade should any of the following occur: CBA's IDR was downgraded by three notches; the D-Cap fell by more than two categories; or the AP that Fitch takes into account in its analysis increased above the '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.