PRESS RELEASE: Fitch: Barclays' Mortgage Covered Bonds 'AAA'

18th Jun 2010 14:24

Fitch Ratings-London-18 June 2010: Fitch Ratings has affirmed Barclays Bank plc's (Barclays, rated 'AA-'/Stable/'F1+') outstanding EUR5.2bn issued under its mortgage covered bond programme at 'AAA'. The bonds are guaranteed by Barclays Covered Bonds LLP, a limited liability partnership incorporated in England and Wales. Fitch has revised Barclays' Discontinuity Factor (D-Factor), a measure of the likelihood of interruption of payments on the covered bonds in the event of a default of the issuer, to 18.6% from 15.1%, after the agency revised its assessment of the pre-maturity test on the bonds. While the pre-maturity test stipulates cash to be posted, or assets to be liquidated, of an amount sufficient to redeem the bonds 12 months prior to their maturity if the issuer's Short-term IDR is downgraded to 'F1' or lower, breach of the test does not constitute an issuer event of default until six months prior to the their maturity. Therefore, less than 12 months may be available to an alternative manager to raise liquidity as assets are not forced to be sold until six months prior to a bond's redemption. The agency views this as weaker than a pre-maturity test where a breach 12 months prior to a bond's maturity immediately leads to an issuer event of default, which has led to the higher D-Factor for the programme. Combined with Barclays' Long-term Issuer Default rating (IDR) of 'AA-', the D-Factor of 18.6% enables the mortgage covered bonds to be rated as high as 'AAA' on a probability of default (PD) basis because over-collateralisation (OC) between the cover assets and the covered bonds is sufficient to sustain the corresponding stress scenario. The programme's current contractual asset percentage (AP) of 77.3% is in line with the supporting AP for Fitch's 'AAA' rating. The programme's collateral consists of Barclays-originated Woolwich and Openplan flexible mortgages, which provide for a pre-agreed line of credit or standalone reserve, and an optional off-set of savings and current accounts, secured by properties in the UK. As of 1 June 2010, the pool consisted of 92,470 loans, totalling approximately GBP13.3bn, with a weighted average (WA) original loan-to-value ratio (LTV) of 60.2%. Based on Fitch's UK residential mortgage default criteria, in a 'AAA' scenario, Fitch has calculated a cumulative weighted average frequency of foreclosure (WAFF) for the cover assets of 16.6% and a weighted average recovery rate (WARR) of 65.9%. The cover pool's WA life is approximately 16.5 years, while the WA life of the liabilities is approximately 8.5 years. A total return asset swap is in place with Barclays to transform interest collections from the cover assets into one month GBP LIBOR plus a spread. A liability swap is in place, also with Barclays, to hedge the currency and basis risk arising from the difference in denominations and interest rates between the cover asset and liabilities. The agency applies its Structured Finance counterparty criteria to the analysis of the swap arrangements. However, the covered bond analysis deviates from the counterparty criteria with respect to interest rate stresses. Given Barclays' Short-term IDR of 'F1+', which the agency views as commensurate with Long-term IDRs between 'AA-' and 'AAA', Fitch relies on the recourse to the issuer and expects the issuer to manage the interest rate risks of the covered bonds. The agency would apply its published high and low LIBOR stresses if Barclays' Short-term IDR were to fall below 'F1+' resulting in a slightly higher supporting level of OC in line with the same rating stress. The impact of applying the LIBOR stresses would be limited for this programme because the total return swap covers interest rate risks except those associated with non-performing loans which would result in a small percentage of the cover pool being unhedged. The supporting AP will be affected, among other things, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. A credit analysis on Barclays Bank plc mortgage covered bonds is available on www.fitchratings.com. Applicable criteria, 'Covered Bonds Rating Criteria', dated 18 December 2009; 'Assessment of Liquidity Risks in Covered Bonds', dated 2 March 2010; 'EMEA Residential Mortgage Loss Criteria', dated 23 February 2010; 'EMEA Residential Mortgage Loss Criteria Addendum - UK', dated 23 February 2010; 'Counterparty Criteria for Structured Finance Transactions', dated 22 October 2009; and 'Counterparty Criteria for Structured Finance Transactions: Derivative Addendum', dated 22 October 2009, are available on www.fitchratings.com. Contact: Vanessa Purwin, London, Tel: +44 (0) 20 7682 7308; John Wu, +44 (0) 20 7070 5813. Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: [email protected]. Additional information is available at www.fitchratings.com. Related Research: Counterparty Criteria for Structured Finance Transactions: Derivative Addendum - Amendedhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=475606Counterparty Criteria for Structured Finance Transactionshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=475588Covered Bonds Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492290Assessment of Liquidity Risks in Covered Bondshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=502266EMEA Residential Mortgage Loss Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500786EMEA Residential Mortgage Loss Criteria Addendum - UKhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500766 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. (END) Dow Jones Newswires June 18, 2010 09:24 ET (13:24 GMT)