OREANDA-NEWS. Fitch Ratings has affirmed ASB Bank Limited's (ASB, 'AA-'/Stable/'F1+') NZD500m of outstanding mortgage covered bonds at 'AAA'. Fitch has also affirmed ASB Finance Limited's (ASBFL, acting though its London branch which has guaranteed covered bond issuance by ASB) outstanding foreign currency denominated mortgage covered bonds equating to NZD1.9bn at 'AAA'. The Outlook is Stable. These covered bonds are guaranteed by ASB Covered Bond Trust Limited, a bankruptcy-remote special purpose vehicle (SPV) established under the laws of New Zealand.

KEY RATING DRIVERS
The rating is based on: ASB's Long-Term Issuer Default Rating (IDR) of 'AA-'; the unchanged Discontinuity Cap (D-Cap) of 2; and the highest nominal asset percentage (AP) in the last 12 months (71.7%), as ASB's Short-Term IDR is above 'F3'. This provides a large buffer when compared to Fitch's breakeven AP for a 'AAA' rating of 86%, supporting a 'AA' tested rating on a probability of default (PD) basis and a 'AAA' rating after giving credit for recoveries. The Outlook on the covered bonds' reflects the Stable Outlook on ASB's IDR.

The 'AAA' breakeven AP of 86%, corresponding to a breakeven overcollateralisation (OC) of 16.3% is driven by the asset disposal loss component of 18.9% due to maturity mismatches with the weighted-average residual life of the assets at 13.3 years, the liabilities at 2.5 years and the refinancing assumptions applied to New Zealand residential mortgages. This is followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario which has remained stable. The cash flow valuation component reduces the 'AAA' breakeven OC by 5.3% due to the excess spread available under the programme. The 'AAA' breakeven AP has increased from 85.5% since last analysis, due to an improvement of the cash flow valuation component which compensates for the deterioration in the asset disposal loss component.

As of 31 October 2015, the cover pool consisted of 22,400 loans secured by first-ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD3.2bn. Fitch's calculated 'AAA' expected loss is 4.0% on the residential mortgage assets, driven by the minimum credit loss at 'AAA' in the agency's analysis.

The unchanged D-Cap of 2 reflects Fitch's weak link assessment of liquidity gap and systemic risk. Soft bullet bonds with a 12 month extension period comprise 34% of total issuance. The remaining hard bullet bonds, which rely on the 12 month pre-maturity test, still drive the assessment in the agency's analysis. This is due to the cure period in the aftermath of an issuer default being shorter than the agency's stressed liquidation period assumption of 12 months for New Zealand mortgage assets.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) ASB's IDR was downgraded by two notches to 'A'; (ii) the D-Cap fell by two categories to 0 (full discontinuity); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis, increased above Fitch's 'AAA' breakeven AP of 86%.

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.

More details on the portfolio and Fitch's analysis will shortly be available in a rating report at www.fitchratings.com.