(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 Outlook from 'AAA'/Rating Watch Negative (RWN).
The downgrade comes one month after Fitch placed all programmes for which the analysis no longer supported the current rating on RWN, following the implementation of its updated Covered Bonds Rating Criteria (see "Fitch Puts YBS Covered Bonds on RWN; Assigns UK Programmes Outlooks & D-Caps" dated 13 September 2012 at ). A one-month period was established to allow issuers to respond to the updated assessment and propose changes to the programme, if appropriate. YBS has not proposed any changes to the programme that would address the drivers of the downgrade.
Under the updated criteria, a Discontinuity Cap (D-Cap) of 4 applies to this programme, 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 the following occurred: (i) the IDR was downgraded by one notch or more to 'BBB' or lower; 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 in its 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 considering recoveries 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 privileged derivatives components, which are the weakest of the D-Cap components. The asset segregation is assessed as very low and cover pool-specific alternative management as low risk from a discontinuity point of view.
The moderate risk liquidity gap assessment reflects the agency's view of the mitigants of a three-month interest reserve fund and a 12-month extendible maturity on the covered bonds. The systemic alternative management reflects the significant role to be performed post issuer default by the administrator of the limited liability partnership that would need to contract other parties to perform important functions as a potential negative for the programme. The active oversight taken by the FSA under the UK regulated covered bonds framework is taken into account as a positive effect. Finally, the privileged derivatives assessment is due to an internal interest rate swap being in place on the cover pool, which is considered highly material for the programme.
The Fitch 'AA+' breakeven AP level of 86.5% for the covered bond rating is higher than Fitch's previous supporting AP of 77.5%, which related to a covered bonds rating of 'AA-' on a PD basis and two-notches recovery uplift. The 'AA+' breakeven AP also improved due to Fitch applying updated refinancing spread assumptions, which are lower than those applied previously and also taking into account the amended asset swap margin.
The Fitch breakeven AP for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, 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)