OREANDA-NEWS. Fitch Ratings has affirmed Westpac New Zealand Limited's (WNZL, 'AA-'/Stable/'F1+') NZD4.16bn of outstanding mortgage-covered bonds at 'AAA'. The Outlook is Stable. The bonds are issued through Westpac Securities NZ Limited, London Branch, a guaranteed issuing vehicle WNZL uses for international funding.

Fitch has also revised the discontinuity-cap (D-Cap) to 3 notches (Moderate High Risk) from 2 notches (High Risk). This is due to the changed assessment of the liquidity gap and systemic risk component, as the outstanding hard-bullet bond is no longer considered material to the component's assessment.

Previously, the assessment was constrained by the hard-bullet bond's pre-maturity test having a six-month cure period, limiting the covered bond guarantor's ability to make timely payments following an issuer event of default. The revised component assessment is supported by a 12-month extension on the outstanding soft-bullet bonds. Fitch believes this improves liquidity protection for timely payment to covered bond holders should recourse switch to the cover pool.

KEY RATING DRIVERS
The rating is based on WNZL's Long-Term Issuer-Default Rating (IDR) of 'AA-', a revised D-Cap of 3 notches and an 86.5% asset-percentage (AP), used in the programme's asset-coverage test (ACT) that Fitch relies on in its analysis. This AP is lower than Fitch's 'AAA' breakeven AP (BE-AP) of 88.5% and supports a 'AA'-tested rating on a probability-of-default (PD) basis and a 'AAA'-rating after giving credit for recoveries. The Outlook on the covered bonds reflects the Stable Outlook on WNZL's IDR.

The D-Cap of 3 notches reflects the moderate high risk assessment of the liquidity gaps and systemic risk component. The assessment is driven by the 12-month extension period on the issued soft-bullet bonds and the three-month reserve that will be funded on the loss of the Short-Term rating of 'F1+'. The other four D-Cap components assessed by Fitch remain unchanged.

The 'AAA' BE-AP of 88.5% has changed from last analysis, as Fitch has fine-tuned its approach to modelling the pro-rata asset sales clause, which is used to restrict the sale of assets in the programme after an issuer event of default and bond extension periods. The equivalent breakeven over-collateralisation at 13.0% reflects a stable 'AAA' credit loss of 4.2% and an asset disposal loss component of 16.6%. The 'AAA'-stressed cash flow valuation component decreases the break-even over-collateralisation by 6.6%, due to excess spread available in the programme.

Fitch takes into account the contractual AP maintained in the ACT, since over-collateralisation exceeding requirement under the ACT is secured by a demand-loan provided by WNZL. These amounts are not available to covered bond holders after an issuer event of default.

As at end-March 2016 the cover pool consisted of 33,559 loans, secured by first-ranking mortgages of New Zealand residential properties, with a total outstanding balance of NZD4.3bn. The cover pool's weighted-average loan-to-value ratio is 52.3%, the weighted-average indexed loan-to-value is 47.1% and the pool is seasoned by 50 months. The cover pool is geographically diversified across New Zealand, with the largest concentrations in Auckland (38.2%) and Wellington (15.6%).

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) WNZL's IDR is downgraded by three notches to 'A-'; or (ii) the D-Cap falls by three notches to 0 (full discontinuity); or (iii) the AP that Fitch takes into account in its analysis increases above Fitch's 'AAA' BE-AP of 88.5%.