Fitch Affirms Leeds Building Society's Mortgage Covered Bonds at 'AAA'; Outlook Stable
06/09/2019 17:29
(The following statement was released by the rating agency) Fitch Ratings-London-September 06: Fitch Ratings has affirmed Leeds Building Society's (LBS; A-/RWN/F1) legislative mortgage covered bonds at 'AAA'. The Outlook is Stable. Leeds Building Society ----senior secured, Mortgage Covered Bonds, Mortgage Covered Bonds; Long Term Rating; Affirmed; AAA; RO:Sta KEY RATING DRIVERS The covered bonds' 'AAA' rating is based on LBS's Long-Term 'A-'Issuer Default Rating (IDR), the various uplifts above the IDR granted to the programme and the overcollateralisation (OC) protection provided through the programme's asset percentage (AP).The covered bonds are rated six notches above the building society's IDR. This is out of a maximum achievable uplift of nine notches, consisting of an IDR uplift of two notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of one notch. Fitch's analysis relies on the highest level of adjusted AP of the last 12 months of 74.6%, which provides more protection than Fitch's 'AAA' breakeven AP of 89.5%. The Stable Outlook on the covered bonds reflects a three-notch buffer against an IDR downgrade.UpliftsThe two-notch IDR uplift reflects that collateralised covered bonds in the UK are exempt from bail-in, that Fitch deems the risk of under-collateralisation at the point of resolution to be sufficiently low, and that a resolution of LBS, should it happen, is not likely to result in the direct enforcement of the recourse against the cover pool.The six-notch PCU reflects the principal liquidity protection provided by a 12-month maturity extension, as well as a dynamic reserve that will cover three months of senior expenses and interest payments. The reserve will be funded when the issuer is rated below 'A' and 'F1'.The recovery uplift for the programme is capped at one notch due to the presence of significant pre-swap FX mismatches between cover assets and liabilities. The FX covered bonds are fully hedged until maturity (including the extension period), but upon a covered bonds' event of default, recoveries from sterling-denominated assets, which have a longer weighted average life than the covered bonds, could expose holders of non-sterling-denominated bonds to FX risk.'AAA' Breakeven AP Fitch's 'AAA' breakeven AP of 89.5% (corresponding to a 'AAA' breakeven OC of 11.7%) is based on a 'AA+' tested rating on a probability of default (PD) basis and a one-notch recovery uplift to 'AAA'. The ALM (asset-liability mismatches) loss of 6.9% remains the largest component of the breakeven OC for the rating due to the significant maturity mismatches between the cover pool and the covered bonds (12.5 years versus three years). It is also driven by the sale constraint defined in the programme' documents whereby assets selected for sale to repay one bond must be selected based on the pro-rata share of that bond. We have maintained the credit loss component at 5.2%. We carried forward the results of our model as the pool characteristics have not changed materially since the last rating action in October 2018 and the relied-upon OC is more than 25% above the breakeven OC for the rating. RATING SENSITIVITIES LBS's 'AAA' covered bonds' rating would be vulnerable to a downgrade if the IDR is downgraded by four or more notches to 'BB+' or below; or if the relied upon-AP provides less protection than Fitch's 'AAA' breakeven AP.Fitch's breakeven AP for the covered bond rating will be affected, among other factors, 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. Contacts: Primary Rating Analyst Julien Caron, Senior Analyst +44 20 3530 1474 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN Secondary Rating Analyst Simon Sive, Analyst +44 20 3530 1073 Committee Chairperson Cosme de Montpellier, Senior Director +44 20 3530 1407 Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 12 Oct 2018) https://www.fitchratings.com/site/re/10044408 Covered Bonds Rating Criteria (pub. 24 Jul 2019) https://www.fitchratings.com/site/re/10081331 EMEA RMBS Rating Criteria (pub. 05 Jul 2019) https://www.fitchratings.com/site/re/10081265 Fitch Ratings Interest Rate Stress Assumptions for Structured Finance and Covered Bonds (pub. 08 Mar 2019) https://www.fitchratings.com/site/re/10065249 Fitch's Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance (Excel) (pub. 24 Jul 2019) https://www.fitchratings.com/site/re/10081774 Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 18 Apr 2019) https://www.fitchratings.com/site/re/10068780 Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 18 Apr 2019) https://www.fitchratings.com/site/re/10069072 Structured Finance and Covered Bonds Country Risk Rating Criteria (pub. 23 Oct 2018) https://www.fitchratings.com/site/re/10047041 Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 27 Jun 2019) https://www.fitchratings.com/site/re/10080349 United Kingdom Residential Mortgage Rating Criteria Addendum (pub. 18 May 2018) https://www.fitchratings.com/site/re/10030716 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10088138 Solicitation Status https://www.fitchratings.com/site/pr/10088138#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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