OREANDA-NEWS. Fitch Ratings has affirmed Bank of New Zealand Limited's (BNZ, 'AA-'/Stable/'F1+') NZD3.58bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. Offshore covered bonds are issued through BNZ International Funding Ltd, a guaranteed issuing vehicle used for international funding by BNZ. Offshore issuance makes up 75% of BNZ's total covered bond issuance.

KEY RATING DRIVERS
The rating is based on BNZ's Long-Term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 3; and the highest nominal asset percentage (AP) in the last 12 months (83.3%), which is lower than Fitch's 'AAA' breakeven AP of 86.5%, supporting a 'AA' tested rating 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 BNZ's IDR.

The 'AAA' breakeven AP of 86.5%, corresponding to a breakeven overcollateralisation (OC) of 15.6%, is driven by the asset disposal loss component of 21.9% due to significant maturity mismatches in the programme and the refinancing assumptions applied to New Zealand residential mortgages, followed by the cover pool's credit loss component of 4.2%. The cash flow valuation component reduces the 'AAA' breakeven OC by 8.7% due to the excess spread available in the programme. The 'AAA' breakeven AP has not changed since last analysis in July 2014, due to the stable composition of the cover pool.

Total covered bond assets have reduced to NZD4.3bn from NZD5.4bn in July 2014. In the same period, there were two covered bond maturities with an aggregate balance of NZD979m. Maturity mismatches are significant, with the WA residual life of the assets at 14.1 years and the liabilities at 2.2 years. As of 17 June 2015, the cover pool consisted of 31,466 loans secured by first-ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD4.2bn. Fitch's calculated 'AAA' expected loss is 4.0% on the residential mortgage assets.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) BNZ's IDR was downgraded by three notches to 'A-'; or (ii) the D-Cap falls by three categories to 0 (full discontinuity); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 86.5%.

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.