OREANDA-NEWS. March 01, 2016. Fitch Ratings has assigned Westpac Banking Corporation's (WBC, AA-/Stable/F1+) Series 2016-C2 USD1.35bn mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance to AUD27.2bn. The fixed-rate bond is due in February 2021, and benefits from a 12-month extendable maturity.

KEY RATING DRIVERS
The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 notches (moderate high), and the asset percentage (AP) relied upon in Fitch's analysis of 89.0%, which is used in the asset coverage test and provides a small buffer to Fitch's breakeven AP of 89.5%. This supports a tested rating of 'AA' 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 WBC's IDR.

The 'AAA' breakeven AP of 89.5%, corresponding to a breakeven overcollateralisation (OC) of 11.7%, is driven by the asset disposal loss component of 16.4% due to the significant mismatches in the programme, with the weighted-average (WA) residual life of the assets at 15 years and the liabilities at 3.9 years. This is followed by the cover pool's credit loss of 3.6% in a 'AAA' scenario. The cash-flow valuation component reduces the 'AAA' breakeven OC by 7.2%, reflecting longer WA life of the assets versus the outstanding liabilities and the excess spread available under the programme.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: WBC's IDR is downgraded by three notches; the D-Cap falls by more than two notches; or the AP that Fitch takes into account in our analysis rises above the 'AAA' breakeven AP of 89.5%.

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.