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Announcement:

Moody's affirms 8 series of Bank of Scotland's UK Aaa covered bonds

Global Credit Research - 15 Dec 2010

GBP5.41 billion of UK covered bonds affected

London, 15 December 2010 -- Moody's Investors Service has today affirmed the Aaa ratings on the following Bank of Scotland UK covered bonds, after changes were made to these bonds' terms:

GBP200,000,000 floating-rate series 14 covered bonds due November 2013 (series 14 covered bonds);

GBP1,000,000,000 callable floating-rate series 33 covered bonds due March 2012 (series 33 covered bonds);

GBP500,000,000 callable floating-rate series 35 covered bonds due September 2012 (series 35 covered bonds);

GBP500,000,000 callable floating-rate series 36 covered bonds due March 2012 (series 36 covered bonds);

GBP500,000,000 callable floating-rate series 37 covered bonds due May 2012 (series 37 covered bonds);

GBP410,000,000 callable floating-rate series 38 covered bonds due May 2014 (series 38 covered bonds);

GBP1,800,000,000 callable floating-rate series 39 covered bonds due July 2015 (series 39 covered bonds);

GBP500,000,000 callable floating-rate series 40 covered bonds due August 2017 (series 40 covered bonds),

Moody's says that the amendments to the terms of these bonds (the "Affected Series"), in and of themselves, do not result in a reduction or withdrawal of the current Aaa rating on these bonds or any other outstanding bonds issued off the covered bond programme. The Affected Series were amended as follows:

(i) Redenomination. Series 35, 36, 37, 39 and series 40 were redenominated in Euros;

(ii) Increases in the margins of the covered bonds. The margins payable for all the Affected Series were increased;

(iii) Change of maturity. For series 33 and 35, the final maturity date was changed to 2014 from 2012 . For series 36 and 37, the final maturity date was changed to 2016 from 2012;

(iv) Put option. A put option has been included in the terms of series 36, 37 and series 40. The Affected Series that now include this put option have an aggregate outstanding nominal amount of EUR1.8 billion.

RATINGS RATIONALE

Moody's took the following factors into account for the purpose of affirming the ratings of the Affected Series:

(i) Redenomination. After the redenomination, 72% of the covered bonds are non-GBP denominated. All the mortgages in the cover pool are denominated in GBP. This increases potential losses due to currency risk. As a result, the over-collateralisation (OC) necessary to maintain the current rating of the covered bonds has increased the level indicated in Moody's Performance Overview published 19 November 2010 by approximately 2% (i.e., the OC necessary to maintain current rating is now 10%). Moody's notes that the current OC level in the pool exceeds the level of OC necessary to maintain the current rating.

(ii) Increases in the margins of the Covered Bonds. Hedging arrangements mitigate the potential for additional losses due to the margin increase of the covered bonds. Furthermore, Moody's quantitative analysis takes into account the potential negative impact of the combined effect of the termination of the swaps and of the higher covered bond margins on the value of the cover pool, after the default of the issuer.

(iii) Change of maturity. The final maturity date of the Affected Series has been extended by two years or more. The impact of the change is limited due to the nominal outstanding amount of the Affected Securities relative to the total amount of covered bonds outstanding. Moody's notes, however, that the new final maturity date reduces the duration gaps between the assets and the liabilities and therefore somewhat reduces refinancing risk.

(iv) Put Option. Moody's notes that the impact of the redemption option is limited as the option is only exercisable on one day (20 December 2014). From a credit point of view, the main feature of the option is that if Bank of Scotland fails to repay the bonds upon the exercise of the put option by the investors, an issuer event of default would occur. However, such failure would not constitute a guarantor event of default and the due date of the relevant Affected Series would revert to the original final maturity date. Therefore, Moody's believes that the potential for additional losses due to the put option following the default of the issuer is limited.

This rating affirmation addresses only the credit risks associated with the transaction, and does not address any other type of risk or aspect of the proposed change that may be relevant to investors.

Moody's expects the Aaa rating assigned to the Covered Bonds to be assigned to all subsequent covered bonds issued by the issuer under this programme. Moody's also expects any subsequent future rating actions in relation to the issuer's covered bonds to affect all such covered bonds.

The principal methodologies used in rating the transaction were "Moody's Rating Approach to Covered Bond" published in March 2010 and "Assessing Swaps as Hedges in the Covered Bond Market", published in September 2008. All can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Rating Methodologies sub-directory on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck

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.

Madrid
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Julie Ng
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms 8 series of Bank of Scotland's UK Aaa covered bonds
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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