OREANDA-NEWS. Fitch Ratings has affirmed Bank of Scotland Plc's (BoS; A+/Stable/F1/a) GBP8.4bn equivalent outstanding mortgage covered bonds at 'AAA' with a Stable Outlook. This follows the implementation of a 12-month extendible maturity (soft bullet) to five of the eight outstanding series after bondholders' consent for the respective series. The remaining three outstanding hard bullet series (with fixed maturity date) account for 44% of the outstanding covered bonds.

KEY RATING DRIVERS
The rating is based on BoS's Long-term Issuer Default Rating (IDR) of 'A+', an unchanged IDR uplift of 1, an unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the 80.0% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 86.0% 'AAA' breakeven AP. The Stable Outlook on the covered bonds rating reflects that on the issuer.

The 'AAA' breakeven AP is unchanged at 86.0% because hard bullets still represent a material proportion of outstanding covered bonds and the switch to soft-bullet for the remaining series, while marginally reducing the maturity mismatches, has a marginal impact on the breakeven AP. The 'AAA' equivalent breakeven OC at 16.3% continues to be driven by asset disposal loss at 14.8% due to significant asset and liability mismatches. This is followed by the 'AAA' credit loss at 8.4%. The cash flow valuation component decreases the 'AAA' breakeven OC by 6.2% due to excess spread.

The 'AAA' credit loss is less than the 10.9% published in April 2015 due to the removal of the fast-track lending hit and an updated house price indexation following Fitch's updated UK mortgage loss assumptions in July 2015.

The Discontinuity Cap (D-Cap) remains unchanged at four notches (moderate risk). The 12-month maturity extension for the soft-bullet bonds provides a comparable level of protection against liquidity risk to the 12-month pre-maturity test for hard bullets. For more information see 'Fitch: No Rating Impact from Bank of Scotland's Planned Switch to Soft Bullet' dated 7 July 2015 at www.fitchratings.com.

Further, the account bank's remedial period for this programme has been amended to 30 calendar days from 30 business days, in line with Fitch's counterparty criteria. For more information see 'Fitch: D-Cap Unchanged in Regulated UK Covered Bond Programmes on Account Bank Review' dated 28 July 2015.

Fitch relies on the 80.0% AP in the asset coverage test published in the investor report.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) BoS's IDR is downgraded by four or more notches to 'BBB' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to one or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 86.0%.

The Fitch breakeven AP for the covered bond rating will be affected, amongst 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 breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.