(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has downgraded Yorkshire Building Society's (YBS,'BBB+'/Stable/'F2') GBP1.8bn mortgage covered bonds to 'AA+', Stable Outlookfrom 'AAA'/Rating Watch Negative (RWN).
The downgrade comes one month after Fitch placed all programmes for which theanalysis no longer supported the current rating on RWN, following theimplementation of its updated Covered Bonds Rating Criteria (see "Fitch Puts YBSCovered Bonds on RWN; Assigns UK Programmes Outlooks & D-Caps" dated 13September 2012 at ). A one-month period was established toallow issuers to respond to the updated assessment and propose changes to theprogramme, if appropriate. YBS has not proposed any changes to the programmethat would address the drivers of the downgrade.
Under the updated criteria, a Discontinuity Cap (D-Cap) of 4 applies to thisprogramme, which combined with the issuer's Long-term Issuer Default Rating(IDR) of BBB+, limits the maximum achievable rating on the programme to 'AA+'.
The 'AA+' rating would be vulnerable to further downgrade if any of thefollowing occurred: (i) the IDR was downgraded by one notch or more to 'BBB' orlower; or (ii) the D-Cap fell by at least one category to 3 (moderate high risk)or lower; or (iii) the asset percentage (AP) that Fitch takes into account inits analysis of 58.7% increased above the agency's 'AA+' breakeven AP of 86.5%.The Stable Outlook on YBS's IDR drives the Stable Outlook on the covered bonds.
The agency takes into account the highest AP of the last year in its analysis,reflecting the issuer's 'F2' Short-term IDR. This level of AP supports a 'AA-'rating on a probability of default (PD) basis and a 'AA+' rating consideringrecoveries given default.
The D-Cap of 4 is driven by the moderate risk assessment of the liquidity gap &systemic risk, the systemic alternative management risk and the privilegedderivatives components, which are the weakest of the D-Cap components. The assetsegregation is assessed as very low and cover pool-specific alternativemanagement as low risk from a discontinuity point of view.
The moderate risk liquidity gap assessment reflects the agency's view of themitigants of a three-month interest reserve fund and a 12-month extendiblematurity on the covered bonds. The systemic alternative management reflects thesignificant role to be performed post issuer default by the administrator of thelimited liability partnership that would need to contract other parties toperform important functions as a potential negative for the programme. Theactive oversight taken by the FSA under the UK regulated covered bonds frameworkis taken into account as a positive effect. Finally, the privileged derivativesassessment is due to an internal interest rate swap being in place on the coverpool, which is considered highly material for the programme.
The Fitch 'AA+' breakeven AP level of 86.5% for the covered bond rating ishigher than Fitch's previous supporting AP of 77.5%, which related to a coveredbonds rating of 'AA-' on a PD basis and two-notches recovery uplift. The 'AA+'breakeven AP also improved due to Fitch applying updated refinancing spreadassumptions, which are lower than those applied previously and also taking intoaccount the amended asset swap margin.
The Fitch breakeven AP for the covered bond rating will be affected, amongothers, by the profile of the cover assets relative to outstanding coveredbonds, which can change over time, even in the absence of new issuances.Therefore it cannot be assumed to remain stable over time.
(Caryn Trokie, New York Ratings Unit)