OREANDA-NEWS. September 21, 2015. Fitch Ratings has affirmed NIBC Bank N.V.'s (NIBC, BBB-/Stable/F3) EUR1.5bn mortgage covered bonds at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects NIBC's Long-term Issuer Default Rating (IDR) of 'BBB-', an unchanged IDR uplift of 1 notch, an unchanged D-Cap of 8 notches (minimal discontinuity risk) and the 87% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the improved 95% breakeven AP for the 'AAA' rating. The latter supports a 'AA' tested rating on a probability of default basis and a two-notch recovery uplift to a 'AAA' rating. The Stable Outlook for the covered bonds rating reflects that on the issuer.

The unchanged D-Cap of 8 reflects Fitch's assessment of minimal discontinuity of the liquidity gap and systemic risk component. This reflects the pass-through feature of the bonds and the three-month interest reserve including senior costs in place for the bonds. It also reflects the programme's registered status with De Nederlandsche Bank, which provides the additional benefit of regular oversight and the appointment of a back-up administrator after a default of NIBC. There are no swaps in place and therefore no swap counterparty risk. The unchanged IDR uplift of 1 reflects protection provided by senior unsecured debt being in excess of 5% of total adjusted assets.

The 95% 'AAA' breakeven AP has increased from 91% since October 2014. This breakeven AP corresponds to the minimum overcollateralisation of 5% required under the Dutch covered bond legislation. The change in AP is primarily driven by NIBC's most recent benchmark issuance with a low coupon, which decreases the weighted average coupon on the bonds during the extension period and results in a higher excess spread. The cash flow valuation accounts for -6.9% of the breakeven AP and the 'AAA' credit loss component for 7.2%.

The 7.2% 'AAA' credit loss represents the impact on the breakeven AP from a 15.7% weighted average default rate (WAFF) and a 57.5% weighted average recovery rate (WARR) for the mortgage cover assets in a 'AAA' scenario. The latest WAFF is an increase from 14.6% previously, due to higher original loan to value levels while the lender adjustment has decreased. The latest WARR is an increase from 54.3%, due to a significantly higher share of annuity loans in the pool for which exposure at default will fall over time, leading to higher recovery rates over time.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR of NIBC Bank N.V. is downgraded by three or more notches to 'BB-' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to six or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 95%.

The Fitch 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 breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.