Fitch Affirms HSBC Bank plc's Covered Bonds at 'AAA'; Outlook Stable
KEY RATING DRIVERS
The covered bond's rating is based on HSBC's Long-term Issuer Default Rating (IDR) of 'AA-' and an unchanged IDR uplift of 1 notch, which together support a tested rating on a probability of default (PD) basis of 'AA'. The 87.0% asset percentage (AP) that Fitch takes into account in its analysis provides more protection than the 92.5% 'AAA' breakeven AP and supports a two-notch recovery uplift to the 'AAA' rating. The unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk), does not factor in the current rating, but provides a buffer against a downgrade of HSBC.
This is a regulated covered bond programme with two bonds outstanding, both with a scheduled maturity in 2017. The issuer has maintained a significant level of overcollateralisation (OC) over time, with the cover pool amounting to GBP6.6bn versus GBP165.9m of covered bonds as of 10-July 2015. The programme remains classified as dormant since there has been no issuance for more than two years.
The unchanged 92.5% 'AAA' breakeven AP, which corresponds to a breakeven OC of 8%, is equivalent to the regulatory minimum OC requirement for UK regulated programmes.
The breakeven OC is mainly driven by the asset disposal loss component of 6.7%. For breakeven AP based on recovery only, this component reflects the stressed valuation of the entire cover pool after an assumed covered bond default. This is followed by the cover pool's credit loss of 4.2% in the 'AAA' scenario, which continues to be the lowest in the UK cover pools. This is unchanged from last year and is constrained by the 'AAA' minimum expected loss assessment for pools because of idiosyncratic risks. The cash flow valuation component leads to a lower breakeven OC by 5.9% which reflects the excess spread in the programme.
The D-Cap of 4 reflects Fitch's unchanged moderate risk assessment for four out of five D-Cap components, including liquidity gap and systemic risk component. The remaining component - asset segregation - has a very low risk assessment. Although the programme is classified as dormant, Fitch has not adjusted the cover-pool specific alternative management component of the D-Cap, as the issuer continues to manage the covered bond programme.
Fitch maintains an IDR uplift of 1 notch to the programme because the covered bonds in the UK are exempt from bail-in and the issuer is a global systemically important financial institution where resolution by other means than liquidation is likely.
In its analysis, Fitch relies on an AP of 87.0%, which is used in the asset coverage test and disclosed in the programme's investor reports.
RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) HSBC's IDR is downgraded by five 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 0.
On 22 September 2015, Fitch published an exposure draft for UK residential mortgage assumptions. The proposed criteria, if adopted, will lead to smaller loss expectations for all types of mortgage portfolios. As a result, Fitch expects all outstanding UK RMBS and CVB ratings to either be affirmed or upgraded. If the current criteria are updated after considering market feedback, Fitch will review the existing ratings accordingly (see "Exposure Draft - Criteria Addendum: UK" at www.fitchratings.com)
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.
More details on the cover pool and Fitch's analysis will be available in a report, which will shortly be available at www.fitchratings.com.
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