22.10.2015, 09:50
Fitch Assigns Kookmin Bank's Series 2015-1 Mortgage Covered Bonds Final 'AAA'
OREANDA-NEWS. Fitch Ratings has assigned Kookmin Bank's (KB; A/Stable) inaugural USD500m Series 2015-1 mortgage covered bonds due October 2020 a final rating of 'AAA'. The Outlook is Stable. The covered bonds benefit from a 12-month extendable maturity.
This is Kookmin's first covered bond issuance from its programme, which is governed under the Korean Covered Bond Act.
KEY RATING DRIVERS
The 'AAA' rating is based on KB's Long-Term Issuer Default Rating (IDR) of 'A', a Discontinuity Cap (D-Cap) of 4 notches; and the asset percentage (AP) of 82.6% used in the asset coverage test, which is lower than Fitch's breakeven AP for a 'AAA' rating of 83.5%. The Outlook on the covered bonds reflects the Stable Outlook on KB's IDR.
The bonds can be rated above the country ceiling due to transferability and convertibility (T&C) risk mitigation in the programme provided by the covered bond swap. Under the swap, the counterparty continues to make payment in foreign currency to bondholders, matching Korean won payments affected by a T&C event. Fitch expects this to be in place for each foreign currency-denominated series to be issued. It notes that the swap would terminate upon a covered bond default, leaving bondholders exposed on cash flows received by way of recoveries from the cover pool. However, Fitch deems this risk to be compatible with the scope of one-notch credit for recoveries. Fitch also believes that any T&C event in South Korea would be temporary.
The breakeven AP considers whether timely payments are met in a 'AA+' scenario and tests for recoveries given default of at least 51% in a 'AAA' scenario. When Fitch considers a stressed valuation of the cover pool following a covered bond default and covered bond swap termination, the breakeven OC is sufficient to cover a Korean won devaluation that leads to foreign-currency bonds becoming more than three times more expensive over the next four years from the termination. Fitch has also assumed multiple bond issuances outstanding to reflect dynamic future issuance profiles in this recovery analysis.
The 'AAA' breakeven AP of 83.5% corresponds to a breakeven OC of 19.8%. It is driven by the cash flow valuation component of 10.5%, which reflects Fitch's stressed cash flow assumptions, the asset disposal loss of 6.0%, reflecting the maturity mismatches between WA life of assets (15.5 years) and the bonds of five years and the refinancing assumptions applied to Korean mortgages, and finally the cover pool's credit loss of 4.2% in a 'AAA' scenario.
The D-Cap of 4 notches reflects Fitch's "moderate" discontinuity risk assessment related to the liquidity gap and systemic risk and the cover pool-specific alternative management components. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch believes that a successful sale of the cover assets would be possible within the bonds' extendible maturity of 12 months to make timely payment. Furthermore, the cover-pool specific alternative management assessment addresses both the quality and quantity of the data provided by the issuer.
At end-June 2015, the cover pool consisted of 15,301 loans secured by first-ranking mortgages of Korean residential properties with a total outstanding balance of KRW2.17trn. The portfolio has a weighted average (WA) current loan-to-value ratio (CLTV) of 43.1% and is 20 months seasoned. By current balance, 49.0% of the pool comprises loans with an interest-only period that convert to full amortisation, 86.7% hybrid loans of floating and fixed rate, and 98.4% loans are secured by apartments. The cover pool is geographically diversified across Korea with the largest exposures in Kyounggi (42.6%) and Seoul (29.8%). Fitch's calculated 'AAA' expected loss on the residential mortgage assets is 4.0%. The assets have a WA life of approximately 15.5 years.
RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) KB's Issuer Default Rating was downgraded by one notch to 'A-'; (ii) the Discontinuity Cap fell by one notch to 3 (Moderate High); (iii) the asset percentage (AP) that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 83.5%; (iv) or if the Country Ceiling of Korea was revised to 'AA' or below; or (v) transfer and convertibility risk mitigation was no longer available.
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.
This is Kookmin's first covered bond issuance from its programme, which is governed under the Korean Covered Bond Act.
KEY RATING DRIVERS
The 'AAA' rating is based on KB's Long-Term Issuer Default Rating (IDR) of 'A', a Discontinuity Cap (D-Cap) of 4 notches; and the asset percentage (AP) of 82.6% used in the asset coverage test, which is lower than Fitch's breakeven AP for a 'AAA' rating of 83.5%. The Outlook on the covered bonds reflects the Stable Outlook on KB's IDR.
The bonds can be rated above the country ceiling due to transferability and convertibility (T&C) risk mitigation in the programme provided by the covered bond swap. Under the swap, the counterparty continues to make payment in foreign currency to bondholders, matching Korean won payments affected by a T&C event. Fitch expects this to be in place for each foreign currency-denominated series to be issued. It notes that the swap would terminate upon a covered bond default, leaving bondholders exposed on cash flows received by way of recoveries from the cover pool. However, Fitch deems this risk to be compatible with the scope of one-notch credit for recoveries. Fitch also believes that any T&C event in South Korea would be temporary.
The breakeven AP considers whether timely payments are met in a 'AA+' scenario and tests for recoveries given default of at least 51% in a 'AAA' scenario. When Fitch considers a stressed valuation of the cover pool following a covered bond default and covered bond swap termination, the breakeven OC is sufficient to cover a Korean won devaluation that leads to foreign-currency bonds becoming more than three times more expensive over the next four years from the termination. Fitch has also assumed multiple bond issuances outstanding to reflect dynamic future issuance profiles in this recovery analysis.
The 'AAA' breakeven AP of 83.5% corresponds to a breakeven OC of 19.8%. It is driven by the cash flow valuation component of 10.5%, which reflects Fitch's stressed cash flow assumptions, the asset disposal loss of 6.0%, reflecting the maturity mismatches between WA life of assets (15.5 years) and the bonds of five years and the refinancing assumptions applied to Korean mortgages, and finally the cover pool's credit loss of 4.2% in a 'AAA' scenario.
The D-Cap of 4 notches reflects Fitch's "moderate" discontinuity risk assessment related to the liquidity gap and systemic risk and the cover pool-specific alternative management components. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch believes that a successful sale of the cover assets would be possible within the bonds' extendible maturity of 12 months to make timely payment. Furthermore, the cover-pool specific alternative management assessment addresses both the quality and quantity of the data provided by the issuer.
At end-June 2015, the cover pool consisted of 15,301 loans secured by first-ranking mortgages of Korean residential properties with a total outstanding balance of KRW2.17trn. The portfolio has a weighted average (WA) current loan-to-value ratio (CLTV) of 43.1% and is 20 months seasoned. By current balance, 49.0% of the pool comprises loans with an interest-only period that convert to full amortisation, 86.7% hybrid loans of floating and fixed rate, and 98.4% loans are secured by apartments. The cover pool is geographically diversified across Korea with the largest exposures in Kyounggi (42.6%) and Seoul (29.8%). Fitch's calculated 'AAA' expected loss on the residential mortgage assets is 4.0%. The assets have a WA life of approximately 15.5 years.
RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) KB's Issuer Default Rating was downgraded by one notch to 'A-'; (ii) the Discontinuity Cap fell by one notch to 3 (Moderate High); (iii) the asset percentage (AP) that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 83.5%; (iv) or if the Country Ceiling of Korea was revised to 'AA' or below; or (v) transfer and convertibility risk mitigation was no longer available.
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.
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