OREANDA-NEWS. Fitch Ratings has affirmed HSBC Bank plc's (HSBC, AA-/Stable/F1+) GBP165.9m equivalent mortgage covered bonds at 'AAA' with a Stable Outlook.

KEY RATING DRIVERS
The covered bonds' rating is based on HSBC's Long-term Issuer Default Rating (IDR) of 'AA-' and an unchanged IDR uplift of 1 notch, which together support a tested rating on a probability of default (PD) basis of 'AA'. The 87.0% asset percentage (AP) that Fitch takes into account in its analysis provides more protection than the 92.5% 'AAA' breakeven AP and supports a two-notch recovery uplift to the 'AAA' rating. The unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk), does not factor in the current rating, but provides a buffer against a downgrade of HSBC.

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 10 January 2016, the 'AAA' weighed average (WA) foreclosure frequency (FF) has declined to 8.6% from 12.4%, while the 'AAA' WA recovery rate (RR) decreased to 53.5% from 67.6% mostly because of the introduction of a loss severity floor. HSBC's cover pool is of high quality while the improvements of the 'AAA' WAFF and WARR are constrained by the 4% minimum 'AAA' expected loss assessment for pools because of idiosyncratic risks.

The unchanged 92.5% 'AAA' breakeven AP, which corresponds to a breakeven overcollateralisation (OC) of 8%, is equivalent to the minimum regulatory OC for UK regulated programmes.

The breakeven OC is mainly driven by the asset disposal loss component of 6.6%. For breakeven AP based on recovery only, this component reflects the stressed valuation of the entire cover pool after an assumed covered bond default. The second driver is the cover pool's credit loss of 4.2% in the 'AAA' scenario, which continues to be the lowest amongst the UK cover pools. The cash flow valuation component leads to a lower breakeven OC by 5.8%, which reflects excess spread in the programme.

This is a regulated covered bond programme with two bonds outstanding, both with a scheduled maturity in 2017. The issuer has maintained a significant level of OC over time, with the cover pool amounting to GBP5.9bn versus GBP165.9m of covered bonds as of 10 February 2015. The programme remains classified as dormant since there has been no issuance for more than two years.

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) HSBC's IDR is downgraded by five 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 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.