OREANDA-NEWS. Fitch Ratings has affirmed Yorkshire Building Society's (YBS, A-/Stable/F1) GBP2,378m mortgage covered bonds at 'AAA' with a Stable Outlook.

KEY RATING DRIVERS
The covered bonds' rating is based on YBS's Long-Term Issuer Default Rating (IDR) of 'A-', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the 87.0% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 88.0% 'AAA' breakeven AP. The latter supports a 'AA' tested rating on probability of default basis and a two-notch recovery uplift to a 'AAA' rating. The Stable Outlook on the covered bonds rating reflects that on the issuer.

Fitch has revised the 'AAA' breakeven AP to 88.0% from 87.0%, corresponding to a breakeven overcollateralisation (OC) of 13.6%. This is due to improved maturity matching between the assets and the covered bonds following two benchmark issuances and one benchmark redemption in 2015.

The asset disposal loss component of 21.5% remains the main driver of the 'AAA' breakeven OC due to the maturity mismatches between the cover pool and the covered bonds (13.0 years versus 3.7 years), which creates large refinancing needs in the event of a switch to the cover pool. Those are assumed to be bridged by a stressed sale of assets in Fitch's cash flow model. This is followed by the cover pool's credit loss of 5.2% in a 'AAA' scenario. The cash flow valuation component leads to a lower 'AAA' breakeven OC by -11.2%, which reflects the excess spread in the programme in a low prepayment scenario.

The IDR uplift is unchanged at zero and the D-Cap remains four notches. The weakest links remain the liquidity gap and systemic risk, systemic alternative management and privileged derivatives.

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) YBS's IDR is downgraded by one 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 three or lower; or (iii) the AP that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 88.0%.

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, 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.