OREANDA-NEWS. Fitch Ratings has affirmed Westpac Banking Corporation's (WBC, AA-/Stable/F1+) AUD27.2bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. The discontinuity cap (D-Cap) has been revised to 4 notches (Moderate risk) from 3 notches (Moderate high risk).

The rating action and revised D-Cap follow the addition of 12-month extendible maturities (soft bullet) to five out of six outstanding benchmark hard bullet covered bonds after bondholders' consent. The conversion of these bonds, which were originally issued with hard bullet maturity dates, brings the total amount of soft bullet bonds to 96.3% of the outstanding covered bond balance. The remaining hard bullet series bond has a scheduled maturity date in November 2016.

KEY RATING DRIVERS

The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', the D-Cap of 4 notches and the asset percentage (AP) of 89.0% used in the programme's asset coverage test. The AP relied on in the analysis is lower than Fitch's 'AAA' breakeven AP of 89.5%, which supports a 'AA' tested rating 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.

Fitch has revised the liquidity gap and systemic risk component of its D-Cap analysis to 'Moderate' (D-Cap of 4 notches) from 'Moderate High' (D-Cap of 3 notches). While one hard bullet bond remains outstanding on the programme, we believe it is immaterial to the assessment of the component as it is likely to be repaid by its maturity date in November 2016, leaving only soft bullet bonds outstanding. In our view, the change to soft bullet on the benchmark covered bonds considered in the solicitation constitutes an effective mitigant against liquidity gaps in the programme. Extendible maturities create a period during which liquidity can be raised from the cover pool should it become the sole source of payment.

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 16.1% due to the significant mismatches in the programme, with the weighted-average (WA) residual life of the assets at 15.4 years and the liabilities at 3.8 years. This is followed by the cover pool's credit loss of 3.7% in a 'AAA' scenario. The cash-flow valuation component reduces the 'AAA' breakeven OC by 6.9%, reflecting longer WA life of the assets versus the outstanding liabilities and the excess spread available under the programme.

As of 29 February 2016, the cover pool consisted of 134,087 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD33.7bn with AUD3.3bn of cash held in the GI account. Fitch expects in a 'AAA' scenario an expected loss of 3.6% on the cover assets, giving credit to lenders' mortgage insurance.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade should any of the following occur: WBC's IDR is downgraded by four notches to 'BBB+'; the D-Cap falls by four categories to 0 (full discontinuity); or the AP that Fitch takes into account in its analysis increases 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.