International credit rating agencies Moody's and Fitch have, as expected, dished out their highest possible credit ratings to ANZ New Zealand's inaugural covered bond issue.
The bank last week issued 500 million euros (about NZ$866.5 million) worth of covered bonds, priced at 95 basis points over the euro interest rate swap rate, to European institutional investors. The covered bonds are direct, unconditional and senior obligations of ANZ NZ, which operates both the ANZ and National banks. They've been rated Aaa by Moody's and AAA by Fitch. ANZ is the third New Zealand bank to issue covered bonds after BNZ and Westpac, with ASB having prepared a programme but is yet to actually issue any.
As Moody's points out, as with all covered bonds, ANZ's ones benefit from two layers of protection by having recourse to both the issuer (the bank itself) and a collateral - or cover - pool of ANZ's customers' mortgages. Covered bonds are set so if the issuing bank defaults, the assets in the cover pool are carved off - or ring fenced - from the bank issuer’s other assets solely for the benefit of the covered bondholders.
This ring fencing of a chunk of a bank’s balance sheet is why covered bonds have previously been banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided last December to change the law, and has introduced legislation allowing Australian banks to issue covered bonds, with issues expected as soon as this year.
According to Fitch, ANZ's cover pool consists of 20,567 loans secured by first ranking mortgages of New Zealand residential properties with a total outstanding balance of NZ$2.710 billion. The portfolio is wholly composed of full documentation loans with a weighted average current loan-to-value ratio of 51.7%, and a weighted average seasoning (or length of time the mortgages have been running) of 30.4 months.
Fixed-rate loans comprise 46.5% of ANZ's cover pool, which is geographically spread around New Zealand, with the largest concentrations being 41.9% in Auckland, 8.8% in Canterbury centred on Christchurch, 9.8% in the Waikato, and 15.8% in Wellington.
Earlier this year Westpac pulled between NZ$60 million and NZ$80 million worth of Christchurch residential mortgages out of the pool used as collateral against its inaugural covered bond issue after the devastating February 22 earthquake.
Meanwhile, Moody's says the robustness of a covered bond rating largely depends on the credit strength of the issuer. It says the issuer's rating would need to be downgraded to A2 before the covered bonds are downgraded, all other things being equal. Moody's rates ANZ Aa3 after downgrading the big four New Zealand banks from Aa2 in May, which is two notches above A2.
ANZ's first covered bond issue is part of a NZ$5 billion programme lauched earlier in the year. The Reserve Bank has mandated a cap that lets banks use up to 10% of their total assets as collateral for covered bonds.
Unlike with residential mortgage backed securities (RMBS), covered bond cashflows are funded by the issuer and not by the cashflows of the mortgage pool. Covered bond investors have dual recourse to the bank and mortgage pool collateral while senior bank bond investors can only claim on the bank, and RMBS investors can only claim on the collateral. Therefore covered bonds typically carry AAA credit ratings.
See Fitch's statement below:
Fitch Ratings has assigned ANZ National Bank Limited's (ANZNBL, 'AA-'/Positive/'F1+') Series 2011-1 EUR500m mortgage covered bonds a 'AAA' rating.
The hard bullet bonds due in October 2016 are issued by ANZ National (Int'l) Limited, an ANZNBL-guaranteed issuance vehicle used for international funding by ANZNBL, acting through its London branch. ANZNBL is a wholly owned subsidiary of Australia & New Zealand Banking Group Limited ('AA-'/ Positive/'F1+').
The issue is guaranteed by ANZNZ Covered Bond Trust Limited. Covered bonds issued under ANZNBL's EUR5bn covered bond programme are backed primarily by a cover pool of New Zealand residential mortgage loans.
"This inaugural issue of covered bonds by ANZNBL continues the expansion of covered bonds as a funding source for banks, with this programme being the third covered bond programme to have issued in this region," said David Carroll, Director in Fitch's Structured Finance team.
The ratings are based on ANZNBL's Long-Term Issuer Default Rating (IDR) of 'AA-' and a Discontinuity Factor (D-Factor) of 30.3%, the combination of which enables the covered bonds to reach a 'AAA' rating for the programme after factoring in recoveries from the cover pool.
The ratings also take into account the programme's asset coverage test, providing sufficient enhancement to sustain 'AAA' stress scenarios applied by Fitch. The initial asset percentage (AP) for this programme is 80.9% (equivalent to a 23.6% overcollateralization or OC) or less, below the 90% limit permitted by the transaction documents and within the 80.9% maximum AP supporting a 'AAA' rating, in Fitch's view.
Supporting AP for a given rating will be affected by, among others, the current profile of cover assets versus the covered bonds, even in the absence of further issuance. It cannot be assumed that a given AP supporting the rating will remain stable over time. Fitch's D-Factors measure the likelihood of interruption of payments on the covered bonds at the time of a default by their issuer, on a scale between 0% and 100%, with 0% reflecting a perfect continuity and 100% equivalent to a simultaneous default of the issuer and its covered bonds.
The D-Factor assigned to ANZNBL's covered bonds reflects the strength of the asset segregation through a bankruptcy remote SPV, which acts as guarantor of the covered bonds; the mitigant to liquidity gap risk in the form of a pre-maturity test, triggering the cash collateralisation of payments due over the next 12 months upon a downgrade of the issuer below 'F1+', or for future soft bullet issues, a 12 month maturity extension; Fitch's expectations of the ability of the cover assets to be transitioned to an alternative manager; and the lack of a covered bond regulatory regime in New Zealand.
As of 30 September 2011, the cover pool consisted of 20,567 loans secured by first ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD2,710m. The portfolio is wholly composed of full documentation loans which have a weighted average current loan-to-value ratio of 51.7%, and a weighted average seasoning of 30.4 months. Fixed-rate loans comprise 46.5% of the cover pool. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 15.5%, and a weighted average loss severity of 53.0%.
The cover pool is geographically distributed around New Zealand's population centres, with the largest concentrations being in Auckland (41.9%), Canterbury (centred on Christchurch, 8.8%), Waikato (9.8%) and Wellington (15.8%).
The agency'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 New Zealand mortgage market. 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.
And here's Moody's statement:
Moody's Investors Service has assigned a definitive long-term rating of Aaa to the Series 2011-1 covered bonds issued by issued by ANZ National (Int'l) Limited (ANZNIL or the issuer), a wholly owned subsidiary of ANZ National Bank Limited (ANZ National, Aa3/Prime-1/C) under the terms of its EUR5 billion Covered Bond Programme.
ANZNIL issued EUR 500 million fixed-rate Series 2011-1 covered bonds with a 5-year hard-bullet maturity. Issuer: ANZ National (Int'l) Limited ....EUR500M Series 2011-1, Definitive Rating Assigned Aaa
RATINGS RATIONALE
The covered bonds are direct, unconditional and senior obligations of ANZ National (Int'l) Limited (ANZNIL) -- a wholly owned subsidiary of ANZ National. The payments of all amounts due in respect of the covered bonds are unconditionally guaranteed by ANZ National. In addition, the covered bonds are secured by eligible assets primarily being a pool of residential mortgage loans originated by ANZ National and eligible substitution assets (the cover pool).
As with all covered bonds, the covered bonds benefit from two layers of protection by having recourse to both the issuer and a collateral pool. The rating therefore takes into account the following factors: 1) The credit strength of ANZ National, rated Aa3. 2) The value of the cover pool. The covered bonds are primarily backed by residential mortgage loans.
Other key factors: 3) Requirement on ANZ National to maintain a maximum asset percentage of 90%, which translates into a minimum over-collateralisation of around 11.1%. Moody's considers this over-collateralisation to be "committed". 4) Structure created by the transaction documents.
Moody's has assigned a Timely Payment Indicator (TPI) of "Improbable" to the covered bonds. The total value of the pool of residential mortgage loans within the cover pool as at cut-off date is approximately NZ$2,710,312,355. The cover pool assets are mortgage loans secured by properties in New Zealand.
The loans have a weighted-average seasoning of 30.4 months and a weighted-average remaining term of 215 months. The weighted-average loan to value (LTV) ratio is 51.73%. The rating assigned by Moody's addresses the expected loss posed to investors. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.
The Aaa rating assigned to the above-referenced covered bonds is expected to be assigned to all subsequent covered bonds issued by the issuer under this programme and any future rating actions are expected to affect all such covered bonds. Should there be any exceptions to this, Moody's will in each case publish details in a separate press release.
KEY RATING ASSUMPTIONS/FACTORS
Covered bond ratings are determined after applying a two-step process: expected loss analysis and TPI framework analysis.
EXPECTED LOSS
Moody's determines a rating based on the expected loss on the bond. The primary model used is Moody's Covered Bond Model (COBOL) which determines expected loss as a function of the issuer's probability of default and the stressed losses on the cover pool assets following issuer default. The Cover Pool Losses for this programme are 24.7%. This is an estimate of the losses Moody's currently models in the event of issuer default.
Cover Pool Losses can be split between Market Risk of 16.3% and Collateral Risk of 8.4%. Market Risk measures losses as a result of refinancing risk and risks related to interest rate and currency mismatches (these losses may also include certain legal risks). Collateral Risk measures losses resulting directly from the credit quality of the assets in the cover pool. Collateral Risk is derived from the Collateral Score which for this programme is currently 6.50%.
TPI FRAMEWORK
Moody's assigns a "timely payment indicator" (TPI) which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI framework is to limit the covered bond rating to a certain number of notches above the issuer's rating.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the credit strength of the issuer. The number of notches by which the issuer's rating may be downgraded before the covered bonds are downgraded under the TPI framework is measured by the TPI Leeway. Based on the current TPI of Improbable the TPI Leeway for this programme is three notches, meaning the issuer rating would need to be downgraded to A2 before the covered bonds are downgraded, all other things being equal.
A multiple notch downgrade of the covered bonds might occur in certain limited circumstances. Some examples might be (a) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (b) a multiple notch downgrade of the issuer; or (c) a material reduction of the value of the cover pool.
For further details on Cover Pool Losses, Collateral Risk, Market Risk, Collateral Score and TPI Leeway across all covered bond programmes rated by Moody's please refer to "Moody's EMEA Covered Bonds Monitoring Overview", published quarterly. These figures are based on the most recent cover pool information provided by the issuer and are subject to change over time.
RATING METHODOLOGY
The principal methodology used in this rating was Moody's Approach to Rating Covered Bonds published in March 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
2 Comments
And the timing of this change of heart from Aus regulators is interesting;
This ring fencing of a chunk of a bank’s balance sheet is why covered bonds have previously been banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided last December to change the law, and has introduced legislation allowing Australian banks to issue covered bonds, with issues expected as soon as this year.
Who would be a term depositor these days - and as you mention in the other thread, particularly in light of the introduction of the OBR.
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