Ratings Affirmed On Northern Rock (Asset Management)'s Covered Bonds Following Review; Outlook Stable
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October 27, 2011
Ratings Affirmed On Northern Rock (Asset
Management)'s Covered Bonds Following
Review; Outlook Stable
Surveillance Credit Analyst:
Vanessa LeBlanc, London (44) 20- 7176-3607; vanessa_leblanc@standardandpoors.com
Secondary Contact:
Nicolas Malaterre, Paris (33) 1-4420-7324; nicolas_malaterre@standardandpoors.com
OVERVIEW
• We have affirmed our 'AAA' rating on Northern Rock (Asset Management)'s
covered bond program and all series of covered bonds issued under the
program.
• Today's rating actions follow our most recent review of cover pool
information and the application of our criteria for assessing
asset-liability mismatch risk in covered bonds.
• The outlook is stable.
LONDON (Standard & Poor's) Oct. 27, 2011--Standard & Poor's Ratings Services
today affirmed its 'AAA' credit ratings on Northern Rock (Asset Management)
PLC's Global Covered Bond Programme and all series of covered bonds issued
under the program. The outlook on the covered bonds is stable.
Today's rating actions follow our review of recent cover pool characteristics
and cash flow information, as well as the application of our covered bond
criteria (see "Revised Methodology And Assumptions For Assessing
Asset-Liability Mismatch Risk In Covered Bonds," published on Dec. 16, 2009).
Following the application of our five-step criteria process, we have assessed
the current asset-liability mismatch (ALMM) risk, the program's category, the
maximum potential covered bond ratings uplift, the cash flow and market value
risk, and the credit enhancement available to the program.
As a result of this analysis, we have determined the maximum potential ratings
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905774 | 300076937Ratings Affirmed On Northern Rock (Asset Management)'s Covered Bonds Following Review; Outlook Stable
uplift for Northern Rock (Asset Management)'s covered bond program to be six
notches above Northern Rock Asset Management's long-term 'A' rating. We have
based this on a program category of "2" and an ALMM classification of "low".
In our market-value risk assessment, we have considered the high proportion of
buy-to-let loans in the portfolio. As such, we have applied a target asset
spread of 5.39%, which is a higher level than what we would apply to prime
residential mortgage pools.
Based on the application of our ALMM criteria and our cash flow assumptions to
assess market-value risk, we believe that the current target credit
enhancement commensurate with a 'AAA' rating is 71%. We have based this target
credit enhancement on the cover pool composition, including cash amounts
sufficient to pass the asset-coverage test. The asset-coverage test is a
feature of the covered bond program. To comply with the asset-coverage test,
the limited liability partnership (LLP) and its members (with the exception of
the liquidation member) must ensure that on each calculation date, the
adjusted aggregate loan amount is equal to, or greater than the principal
amount outstanding of covered bonds. We have based our assessment of the
current available credit enhancement on the latest principal balance of
mortgage loans and the full cash balance in the cover pool as provided by the
issuer.
There are currently five series of covered bonds outstanding, totaling £5.954
billion (equivalent). The current available credit enhancement of 98% exceeds
the target credit enhancement of 71%. We have therefore affirmed our maximum
'AAA' ratings on the covered bonds. This represents an uplift of five notches
above our issuer credit rating on Northern Rock (Asset Management) PLC (ICR;
A/Stable/A-1).
We have based our credit analysis on the latest cover pool information
received as of June 30, 2011. As of that date, the cover pool comprised
approximately £11.01 billion of mortgage assets and £2.2 billion of cash.
The key characteristics of the mortgage loans in the portfolio as at June 30
were:
Total principal balance mortgage loans (£) 11,006,708,489
Total number of mortgage loans 80,426
Average mortgage loan size (£) 136,855
WA indexed LTV ratio for mortgage loans (%)[1] 92.44
WA seasoning (months) 57
Proportion of buy-to-let loans (%) 27.60
LTV--Loan-to-value.
WA--Weighted-average
[1]As calculated by Standard & Poor's.
Our credit analysis referenced these characteristics and included the
following scenarios:
• We assessed the likelihood that the borrower would default on its
mortgage payments (the foreclosure frequency) and the amount of loss on
Standard & Poors | RatingsDirect on the Global Credit Portal | October 27, 2011 2
905774 | 300076937Ratings Affirmed On Northern Rock (Asset Management)'s Covered Bonds Following Review; Outlook Stable
the subsequent sale of the property (the loss severity, expressed as a
percentage of the outstanding loan).
• We determined the total mortgage balance that we assume will default, and
the total amount of this defaulted balance that the issuer does not
recover for the entire cover pool, by calculating the weighted-average
foreclosure frequency (WAFF) and the weighted-average loss severity
(WALS).
The product of the WAFF and WALS is the net loss that we assume may affect the
portfolio in a 'AAA' scenario. At a 'AAA' level, the WAFF and WALS results as
of June 30 were:
WAFF (%) 49.44
WALS (%) 35.59
Assumed net credit loss (WAFF x WALS) (%) 17.60
We have not given benefit to the government guarantee arrangements in respect
of Northern Rock (Asset Management)'s covered bonds because we have not
received comfort that the guarantee arrangements meet our sovereign-guaranteed
debt criteria for rating substitution (see "Rating Sovereign-Guaranteed Debt,"
published on April 6, 2009).
We have maintained our stable outlook on the covered bonds. The stable outlook
reflects the additional notch of unused uplift based on our ALMM criteria. All
else being equal, if we were to lower the issuer's ICR by one notch, the
covered bonds could still maintain their 'AAA' ratings. Alternatively, if the
ALMM classification changed to "moderate", the 'AAA' ratings could still be
maintained. Given the current asset and liability profile of the covered bond
program, we expect the ALMM to remain "low" for the next 12 months.
We believe that the current asset percentage commensurate with a 'AAA' rating
is not reflected in the issuer's investor report as at Sept. 30. However, our
expectation, based on information from the issuer, is that the cover pool
composition will not change materially and will be primarily affected by
mortgage repayments and covered bond maturities. We also understand from
discussions with the issuer that it intends to maintain overcollateralization
levels in the cover pool to a level that is in line with the asset percentage,
which we believe is commensurate with a 'AAA' rating on the covered bonds. If
the issuer were to remove the excess collateral in the cover pool to a level
commensurate with the current reported asset percentage, a 'AAA' rating would
not be achievable. Nevertheless, we believe the rating would not fall by more
than one rating category, all else being equal.
We will continue to monitor overcollateralization levels in line with our
regular surveillance cycle, as well as the composition of the cover pool, in
terms of the amount of principal receipts held in the LLP guaranteed
investment contract (GIC) account.
RELATED CRITERIA AND RESEARCH
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905774 | 300076937Ratings Affirmed On Northern Rock (Asset Management)'s Covered Bonds Following Review; Outlook Stable
• The Specter Of A Double Dip In Europe Looms Larger, Oct. 4, 2011
• U.K. Prime RMBS Index Report Q2 2011--Performance Improves, But Slow
Economic Growth Remains A Risk, Sept. 15, 2011
• Northern Rock (Asset Management) PLC, April 6, 2011
• Request For Comment: Covered Bonds Counterparty And Supporting
Obligations Methodology And Assumptions, March 23, 2011
• Principles Of Credit Ratings, Feb. 16, 2011
• Methodology: Credit Stability Criteria, May 3, 2010
• Revised Methodology And Assumptions For Assessing Asset-Liability
Mismatch Risk In Covered Bonds, Dec. 16, 2009
• Update To The Cash Flow Criteria For Rating European RMBS Transactions,
Jan. 6, 2009
• Update To The Criteria For Rating U.K. Residential Mortgage-Backed
Securities, Jan. 6, 2009
• European Legal Criteria For Structured Finance Transactions, Aug. 28,
2008
• Methodology & Assumptions: Applying The Derivative Counterparty Framework
To Covered Bonds, Feb. 26, 2008
• Revised Framework For Applying Counterparty And Supporting Party Criteria,
May 8, 2007
• Guidelines For The Use Of Automated Valuation Models For U.K. RMBS
Transactions, Sept. 26, 2005
• Treatment Of Flexible Mortgage Loans In U.K. RMBS Transactions, April 6,
2005
• Cash Flow Criteria For European RMBS Transactions, Nov. 20, 2003
• Revised Criteria For Rating U.K. Residential Mortgage-Backed Securities,
July 5, 2001
Related articles are available on RatingsDirect. Criteria, presales, servicer
evaluations, and ratings information can also be found on Standard & Poor's
Web site at www.standardandpoors.com. Alternatively, call one of the following
Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London
Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt
(49)69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.
Additional Contact:
Covered Bonds Surveillance; CoveredBondSurveillance@standardandpoors.com
Standard & Poors | RatingsDirect on the Global Credit Portal | October 27, 2011 4
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