OREANDA-NEWS. Fitch Ratings has affirmed The Royal Bank of Scotland PLC's (RBS, BBB+/Stable/F2) GBP6.0bn equivalent mortgage covered bonds at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating is based on RBS's Long-term Issuer Default Rating (IDR) of 'BBB+', a revised IDR uplift of 1 (from 2), an unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the 83.3% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 87.5% 'AAA' breakeven AP. The latter supports a 'AA' tested rating on probability of default basis and a two-notch recovery uplift to a 'AAA' rating. The Stable Outlook on the covered bonds' rating reflects that on the issuer.

The 87.5% 'AAA' breakeven AP has decreased from 89.0% since September 2014. The change is primarily driven by testing additional major upcoming maturity at which recourse against the cover pool is enforced. This results in a higher maturity mismatches between the assets and the bonds and a lower additional OC provided by the negative carry factor in the asset coverage test. The asset disposal loss component of 10.8% remains the main driver of the 14.3% 'AAA' breakeven OC. This is followed by the 'AAA' credit loss of 5.3%, which is in line with its peers. The stressed cash flow valuation has increased the 'AAA' breakeven OC by 0.1%.

The IDR uplift has been revised to 1 notch (from 2). This is because the issuer group's current senior unsecured debt level has reduced to below 5% of the funded balance sheet, reflecting lower protection for covered bonds in case of a bank's resolution. The 1 notch reflects the issuer's systemic importance in its domestic market, so that resolution by other means than liquidation is deemed likely.

The D-Cap is unchanged at 4 notches. The asset segregation assessment has been revised to very low risk, from low risk, subsequent to the revision of the remedial period of the account bank to 30 calendar days, which is in line with Fitch's counterparty criteria, in July 2015. The remaining four components, including liquidity gap and systemic risk component, remain moderate risk.

In its analysis, Fitch takes into account the 83.3% AP which is used in the asset coverage test and published in the investor report.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) RBS's IDR is downgraded by one 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 4 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 87.5%.

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.