The rating is based on BNZ's 'AA' LTIDR and a Discontinuity Factor (D-Factor) of 26.4pc, the combination of which enables the covered bonds to reach a 'AAA' rating for the programme on a probability of default basis. The rating also takes into account the programme's asset coverage test, providing sufficient enhancement to sustain 'AAA' stress scenarios applied by the agency. All else being equal, the covered bonds can remain at 'AAA' as long as BNZ's LT IDR is at least 'A-'.
Fitch has also updated the D-Factor in light of its new Covered Bonds Counterparty Criteria, published 14 March 2011. The D-Factor reflects concerns regarding derivative counterparty replacement where the derivative counterparty to the asset-owing special purpose vehicle is also the issuer. As BNZ hedges its programme against interest rate and currency risks, Fitch has increased the D-Factor to reflect a closer dependency to the issuer's credit risk, as compared to covered bond issuers that have entered into privileged swaps with third-party institutions.
The agency is currently in the implementation phase of its new Covered Bond Counterparty Criteria. The above D-Factor is dependent on BNZ finalising proposed documentation changes that enhance liquidity available within the programme. In the event that these proposed documentation changes do not proceed, this will lead to an additional increase of the D-Factor when the implementation period ends in mid-September 2011, although this would not affect the current rating of the covered bonds.
The current asset percentage (AP) of 83.3pc is below the 'AAA' supporting AP of 86.4pc. The supporting AP for a given rating will be affected by, among others, the current profile of cover assets relative to the outstanding covered bonds which, even in the absence of further issuance, can change. It cannot be assumed that a given AP supporting the rating will remain stable over time.
As of 21 June 2011, the cover pool consisted of 29,239 loans secured on New Zealand residential properties with a total outstanding balance of approximately NZD4.1bn. The portfolio is wholly made-up of full documentation loans with a weighted average current loan-to-value ratio of 49.4pc, and a weighted average seasoning of 34.7 months. The cover pool is geographically distributed around New Zealand's population centres, with the largest concentrations in Auckland (38.9pc), Wellington (12.8pc) and Canterbury (centred on Christchurch - 11.0pc).
Fitch's mortgage default analysis is based on the Australian mortgage default model criteria, updated with a New Zealand-specific default probability, market value declines, and other risk adjustments that relate to the domestic mortgage market. The cover assets have a weighted average residual maturity of 21.5 years, whereas the covered bonds have a WA residual maturity of 6.1 years.
Fitch has formed assumptions about the default probability and losses of the cover pools under a 'AAA' stress scenario, and tested maturity mismatches between the cover pools and possible covered bond issuances in a wind-down scenario under the management of a third party.
The agency will monitor the key characteristics of the cover assets and outstanding covered bonds on an ongoing basis, and check whether the over collateralisation taken into account in its analysis provides protection commensurate with the rating.
Copyright Reuters, 2011