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Link to Fitch Ratings' Report: The Royal Bank of Scotland plc - Mortgage Covered Bondshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534605Fitch Ratings-London-22 June 2010: Fitch Ratings has assigned the Royal Bank of Scotland plc's (RBS, rated 'AA-'/Stable/'F1+') Series 1 mortgage covered bonds a 'AAA' rating. The EUR1.25bn soft bullet issuance benefits from an extended maturity date of one year following its expected maturity date of June 2013. At the same time, the agency has withdrawn the issuer's expected programme rating of 'AAA'. Going forward, Fitch will assign and maintain ratings on the basis of each issuance from the programme, rather than on the programme itself. The 'AAA' rating is based on RBS's Long-term Issuer Default Rating (IDR) of 'AA-' and a Discontinuity Factor (D-Factor) of 14.8%, the combination of which enables the mortgage covered bonds to be rated 'AAA' on a probability-of-default (PD) basis. Overcollateralisation (OC) between the cover assets and the covered bonds is sufficient to sustain a 'AAA' level of stress. The programme's current contractual asset percentage (AP) is equal to the supporting AP of 79.1%, which is sufficient to support the agency's 'AAA' rating. The current nominal AP is 22.6%, which equates to 343% OC. Fitch D-Factors measure the likelihood of payment interruption upon an issuer default. The D-Factor assigned to RBS's covered bonds reflects the comfort gained from the segregation of the cover assets in the bankruptcy-remote special-purpose company acting as guarantor, the issuer's adequate IT systems to ensure continuity of the programme, the contractual provisions in place governing the management of the cover pool post issuer default and the oversight role of the Financial Services Authority under the UK regulated covered bond framework. The D-Factor also incorporates Fitch's assessment of the liquidity gaps that would arise in the immediate aftermath of a potential default of the issuer while the guarantee is being exercised. The cover assets are deemed to require up to nine months for liquidation in a stressful scenario, while the covered bonds have an extendible maturity of 12 months allowing the alternative manager to sell loans during this period. RBS's cover pool is made up of UK mortgage loans originated by itself and National Westminster Home Loans Limited, a subsidiary of the Royal Bank of Scotland Group plc. As of end-April 2010, the pool consisted of 33,820 loans secured on residential properties, with a total outstanding balance of GBP4.6bn. The cover pool has a weighted-average (WA) original loan-to-value ratio (LTV) of 70.1%. The WA current indexed LTV, based on Fitch's approach of giving credit to 50% of any appreciation in the house price index and full consideration to any depreciation in the index, is 67.6%. The WA age of the loans is 12.2 months. The cover pool includes 4.7% of buy-to-let loans, which Fitch believes have a greater PD compared to standard owner-occupied loans. In a 'AAA' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 24.8% and a WA recovery rate of 63.6%. The cover assets yield a mix of fixed and floating rates. Six interest rate swaps are in place with a suitably-rated counterparty, RBS, to transform interest collections from the cover assets into one-month GBP LIBOR plus a spread. The Series 1 covered bonds pay a fixed rate of interest. A liability swap is in place, also with RBS, to hedge the currency and basis risks arising from the difference in denominations and interest rates between the cover assets and the covered bonds. The agency applies its structured finance counterparty criteria to the analysis of the swap arrangements. However, given RBS's Short-term IDR of 'F1+', which the agency views as commensurate with a Long-term IDR of between 'AA-' and 'AAA', Fitch relies on the issuer to manage the interest rate risks of the covered bonds. The agency would apply its published high and low GBP LIBOR stresses should RBS's Short-term IDR fall below 'F1+', resulting in a slightly higher level of OC in line with the same rating stress. The impact of applying the GBP LIBOR stresses would be limited for this programme because the interest rate swaps cover for interest rate risks except those associated with non-performing loans which would result in a small percentage of the cover pool being unhedged. The effects of a required current balance amount clause (please refer to the 4 June 2009 report, "Contractual Mechanisms in Covered Bonds: Under the Spotlight", discussed under the term 'selected assets required amount' (SARA), at www.fitchratings.com), as well as the capacity constraints generated by the amount of assets required to be sold at any given time following default of the issuer, were factored into the agency's analysis. 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 full rating report on the Royal Bank of Scotland plc's 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; 'Counterparty Criteria for Structured Finance Transactions', dated 22 October 2009; 'Counterparty Criteria for Structured Finance Transactions: Derivative Addendum', dated 23 October 2009; 'EMEA Residential Mortgage Loss Criteria', dated 23 February 2010; 'EMEA Residential Mortgage Loss Criteria Addendum - UK', dated 23 February 2010; 'Criteria for Automated Valuation Models in EMEA RMBS', dated 20 November 2008; 'Addendum - Criteria for Automated Valuation Models in EMEA RMBS', dated 20 November 2008, are available on www.fitchratings.com. Contacts: John Wu, London, Tel: +44 (0) 20 7070 5813; Vanessa Purwin, +44 (0) 20 7682 7308. Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: [email protected]; Christian Giesen, Frankfurt am Main, Tel: + 49 (0) 69 7680 762 32, Email: [email protected]. Additional information is available on www.fitchratings.com. Related Research: EMEA 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=500766Criteria for Automated Valuation Models in EMEA RMBShttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=415268Addendum - Criteria for Automated Valuation Models in EMEA RMBShttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=415270Covered 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=502266Counterparty Criteria for Structured Finance Transactionshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=475588Counterparty Criteria for Structured Finance Transactions: Derivative Addendum - Amendedhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=475606 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 22, 2010 08:50 ET (12:50 GMT)