OREANDA-NEWS. Fitch Ratings says there is no rating impact on ABN Amro Bank N.V.'s (ABN, A/Stable/F1) EUR24.302bn mortgage covered bonds rating following recent amendments to the hedging structure. The covered bonds are rated 'AAA' on Stable Outlook and guaranteed by ABN AMRO Covered Bond Company B.V. (CBC).

The amendments have led to a decrease in Fitch-calculated break even asset percentage (AP) for the 'AAA' rating to 76.0% from 80.0%, which is below the 79.0% AP used in the asset coverage test which is reported monthly in the investor report. However, ABN will amend this committed AP in its monthly investor report to a level at least as low as 76% AP. This commitment, together with ABN's Long-term Issuer Default Rating (IDR) of 'A', the unchanged IDR uplift of 2 notches and the unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk), underpin the covered bonds 'AAA' rating.

The 76.0% AP supports 'AA' stresses on a probability of default basis and provides for outstanding recoveries (in excess of 91%) on the covered bonds in an 'AAA' stress scenario, allowing the covered bonds to achieve a two-notch uplift on a recovery basis above the 'AA' rating on a probability of default basis.

ABN, as swap counterparty, the CBC and Stichting Trustee ABN AMRO Covered Bond Company have agreed to terminate the asset swap agreement closed at inception. In addition, the covered bond swaps on all outstanding euro-denominated covered bonds, totalling EUR22.7bn, have been terminated. Pursuant to the termination agreement, no termination payments were due by any party. The structured swap agreements on the non-euro denominated covered bonds, totalling EUR1.6bn, remain in place. Fixed-rate obligations account for 97% of the total outstanding covered bonds.

As of end-November 2015, the cover pool consisted of 91% fixed- and 9% floating-rate loans. In its cash-flow analysis Fitch has modelled the stressed asset cash flows under its stable, decreasing and increasing interest rates scenarios to reflect the interest reset nature of the loans under different scenarios. In a low interest rate scenario, the loans were assumed to reset at a floating rate with a lower margin than the current margins on floating-rate loans. Conversely, in a rising interest rate scenario, loans were assumed to reset at a fixed rate. The weighted average (WA) interest reset date of the fixed-rate loans is 4.8 years, compared with a weighted average life of 8.4 years for the liabilities. As such, there is some natural interest rate match between the assets and liabilities, and the removal of the swaps has had only a moderate impact on the breakeven AP for the rating.

As part of its discontinuity analysis, Fitch has revised its assessment of privileged derivative risk component to low from moderate, to reflect the limited dependence on ABN as an intra-group counterparty. The privileged derivatives component is not the weakest link in Fitch's discontinuity risk assessment which remains moderate, driven by the liquidity gap and systemic risk, asset segregation and cover pool specific alternative management components.

The Fitch breakeven AP for the rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change, even in the absence of new issuance. Therefore it cannot be assumed to remain stable over time.