London, 03 June 2011 -- Moody's Investors Service has assigned a provisional long term rating
of (P)Aaa to the Series 1 covered bonds to be issued by Clydesdale Bank
plc (Clydesdale or the issuer) under its newly established second covered
bond programme.
RATINGS RATIONALE
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 the issuer, rated A1 on review for possible
downgrade / Prime-1 / C-.
2) The credit quality of the cover pool. The covered bonds are
backed by residential mortgage loans.
Other key factors:
3) The commitment of the issuer to maintain a minimum over-collateralisation
which Moody's views as "committed".
4) The use of structuring techniques designed to mitigate the rating linkage
between the issuer and the covered bonds. These include a provision
to allow for a principal refinancing period of at least 12 months.
Moody's notes that the issuer rating currently is on review for
possible downgrade. The over-collateralisation necessary
to reach Aaa given the current issuer rating of A1 is 22.5%.
In case of a downgrade of the issuer to A2, this number is 25%.
Moody's has assigned a Timely Payment Indicator (TPI) of "Probable" to
the covered bonds.
As of the launch date, the total value of the assets expected to
be included in the cover pool, comprising 16,330 residential
mortgage accounts, will be approximately GBP1.6 billion.
The cover pool assets are mortgage loans secured by properties in the
UK. In the residential pool the loans have a weighted-average
seasoning of 23 months and a weighted average remaining term of 209 months.
The weighted average loan-to-value (LTV) ratio is 63.9%
on an indexed basis.
The provisional 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.
Moody's issues provisional ratings in advance of the final sale of securities,
and these ratings only represent Moody's preliminary opinion. Upon
a conclusive review of the transaction and associated documentation,
Moody's will endeavour to assign a definitive rating to the Covered Bonds.
Assuming assignment of a definitive Aaa upon initial issuance of covered
bonds, all subsequent covered bonds issued by the issuer under this
programme would be expected to be assigned a Aaa rating. Consequently,
any subsequent future rating actions in relation to the issuer's covered
bonds 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.
A copy of Moody's Pre Sale Report for this transaction will be available
on our website www.moodys.com. Alternatively please
call Moody's Client Service Desk on +44 (0) 20 7772 5454
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 expected to be 22.7%.
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 16.6% and Collateral Risk of 6.2%.
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 provisionally 9.2%.
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 Probable and an issuer
rating of A1 the TPI Leeway for this programme is three notches,
meaning the issuer rating would need to be downgraded to Baa1 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
to Moodys and are subject to change over time.
RATING METHODOLOGY
The principal methodology used in rating the covered bonds is Moody's
Approach to Rating Covered Bonds published in March 2010. Other
methodologies and factors that may have been considered in the rating
process can also be found on the Moody's website.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary and Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Martin Rast
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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
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 assigns provisional (P)Aaa rating to Clydesdale's covered bonds
