OREANDA-NEWS. February 08, 2016. 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 a probability of default basis and a two-notch recovery uplift to 'AAA'. The Stable Outlook on the covered bonds' rating reflects that on the issuer.

Fitch published an updated criteria addendum for UK residential mortgage loans on 16 December 2015, which we used for the cover pool's credit analysis. Based on the loan-by-loan data as of end-September 2015, the overall impact on the 'AAA' credit loss is positive by around 1%. The 'AAA' WA foreclosure frequency (FF) reduces to 11.3% from 16.0%, while the 'AAA' WA recovery rate (RR) decreases to 64.1% from 69.0% mostly because of the introduction of a loss severity floor.

The 'AAA' breakeven AP of 88.0% remains unchanged compared with the last analysis in December 2015 despite the improvement of the credit loss. This is due to the effect of the selected assets required amount (SARA) clause, which limits the amount of assets that can be sold for any one bond.

The asset disposal loss component of 22.1% remains the main driver of the 'AAA' breakeven OC. It reflects the impact of modelling the stressed sale of the assets to achieve a timely payment in a 'AA' stress scenario, as well as the effect of the SARA clause. This is followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario. The cash flow valuation component leads to a lower 'AAA' breakeven OC by -11.3%, which reflects the excess spread in the programme in a low prepayment scenario.

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%.

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.

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.