OREANDA-NEWS. Fitch Ratings has affirmed The Co-operative Bank plc's (Co-op, B/Stable/B) GBP600m outstanding mortgage covered bonds at 'BBB+' with a Stable Outlook.

KEY RATING DRIVERS
The rating is based on Co-op's Long-term Issuer Default Rating (IDR) of 'B', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and an asset percentage (AP) of 77.5% that Fitch takes into account in its analysis, which provides more protection than the unchanged 89.5% 'BBB+' breakeven AP. The Stable Outlook on the covered bond rating reflects that on the issuer. Any rating action taken on the issuer's IDR will impact the 'BBB+' covered bond rating.

The unchanged 'BBB+' breakeven AP of 89.5% reflects the stable nature of the programme. The breakeven AP supports a 'BB+' tested rating on a probability of default (PD) basis and a 'BBB+' rating after giving credit for a three-notch recovery. In its analysis, Fitch relies on an AP of 77.5%, which is used in the asset coverage test released on the programme's investor reports.

The weakest links in the D-Cap of 4 continue to be the liquidity gap & systemic risk, systemic alternative management and cover pool-specific alternative management. The privileged derivatives component is low.

The 89.5% 'BBB+' breakeven AP, corresponding to a breakeven over-collateralisation (OC) of 11.7%, is calculated based on a worst case scenario that assumes an issuer event of default upon bond maturity. It results in an asset disposal loss component of 18.5% due to the need of asset sales to meet bond payment. The cash flow valuation component leads to a lower 'BBB+' breakeven OC by 6.2% due to the longer weighted average life of the assets versus the liability and the margin earned on the assets.

The 'BBB+' credit loss component has increased to 1.3% from 0.9%, and represents the impact on the breakeven OC from a lower weighted average default rate to 4.5% (6.6% previously) and a lower weighted average recovery rate to 71.1% (86.2% previously). This reflects the agency's updated UK residential mortgage assumptions, notably the introduction of a loss severity floor. The cover pool is of sound quality and compares well with UK peers.

RATING SENSITIVITIES
The 'BBB+' rating would be vulnerable to a 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 more; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'BBB+' breakeven level of 89.5%.

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.