OREANDA-NEWS. Fitch Ratings has assigned National Australia Bank Limited's (NAB, AA-/Stable/F1+) Series 26 USD1.4bn mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance to AUD21.1bn. The fixed-rate bond is due in March 2021 and benefits from a 12 month extendable maturity.

KEY RATING DRIVERS
The rating is based on NAB's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the asset percentage (AP) relied upon in Fitch's analysis of 89.5%, which is used in the asset coverage test and provides a small buffer to Fitch's breakeven AP of 90%. 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 NAB's IDR.

The 'AAA' breakeven AP of 90%, corresponding to a breakeven over-collateralisation (OC) of 11.1%, is driven by the asset disposal loss component of 14.4% due to the significant mismatches in the programme, with the weighted-average (WA) residual life of the assets at 16.4 years and the liabilities at five years. This is followed by the cover pool's credit loss of 3.8% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 6.1%, reflecting longer WA life of the assets versus outstanding liabilities and excess spread available under the programme.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to a downgrade should any of the following occur:
- NAB's IDR is downgraded by four notches
- the D-Cap falls by more than three notches
- the AP Fitch takes into account rises above the 'AAA' breakeven AP of 90%

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.