OREANDA-NEWS. November 24, 2015. Fitch Ratings has revised the Outlook on The Co-operative Bank plc's (Co-op, B/Stable/B) GBP600m outstanding mortgage covered bonds to Stable from Negative, while affirming the rating at 'BBB+'.

KEY RATING DRIVERS
The Outlook revision of the covered bond follows a similar action on Co-op's Long-term Issuer Default Rating (IDR) to Stable from Negative (see 'Fitch Revises The Co-operative Bank Plc's Outlook to Stable; Affirms at 'B'', dated 19 November 2015 at www.fitchratings.com).

The 'BBB+' rating of the covered bonds is based on Co-op's IDR of 'B', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the 77.5% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 89.5% 'AAA' breakeven AP. The 89.5% AP supports a 'BB+' tested rating on probability of default basis and a three-notch recovery uplift to 'BBB+'.

The 89.5% 'BBB+' breakeven AP, corresponding to a breakeven OC of 11.7%, is unchanged from our last rating action in March 2015. The worst case scenario of cash flow analysis remains unchanged, which assumes the payment switches to the cover pool just before the bond matures. It results in an asset disposal loss component of 18.8%, reflecting the need for asset sales to meet bond payment.

The 'BBB+' credit loss of 0.9% represents the impact on the breakeven OC from the 6.6% 'BBB+' weighted average (WA) default rate and the 86.2% WA recovery rate for the mortgage cover assets. The cover pool is well seasoned (89 months as of end-Sep15) and geographically diversified. The weighted average current loan-to-value was 52.7% as of end-September 2015, which is lower than the UK average. Loans in arrears are taken out of the pool regularly.

The cash flow valuation component leads to a lower 'BBB+' breakeven OC by 7.5%, which reflects excess spread in the programme.

In its analysis, Fitch relies on an AP of 77.5% which is used in the asset coverage test disclosure on the programme's investor reports.

RATING SENSITIVITIES
The 'BBB+' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by 1 or more notches to 'B-' or below; or (ii) the number of notches represented by the D-Cap is reduced to 3 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'BBB+' breakeven level of 89.5%.

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, among others, by the profile of the cover assets relative to outstanding covered bond, 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.