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Announcement:

Moody's downgrades covered bonds of two UK Issuers; continues review of five other programmes

27 May 2009

Covered Bonds issued under seven programmes affected

London, 27 May 2009 -- Moody's Investors Service has taken the following rating actions on the covered bonds issued by certain UK institutions:

- Residential Mortgage Covered Bonds issued by Chelsea Building Society:

Downgraded to A1, from Aa3 on review for possible downgrade. Previously on 16 April 2009 downgraded to Aa3 from Aaa and placed on review for possible downgrade.

The Timely Payment Indicator (TPI) assigned to this programme is Probable.

- Residential Mortgage Covered Bonds issued by Yorkshire Building Society:

Downgraded to Aa1, from Aaa on review for possible downgrade. Previously on 16 April 2009 placed on review for possible downgrade.

The TPI assigned to this programme is Probable.

- Residential Mortgage Covered Bonds issued by Newcastle Building Society:

Aaa; remains on review for possible downgrade. Previously on 16 April 2009 placed on review for possible downgrade.

The TPI for this programme is being re-assessed in light of the proposed structural enhancement.

- Residential Mortgage Covered Bonds issued by Norwich & Peterborough Building Society:

Aaa; remains on review for possible downgrade. Previously on 16 April 2009 placed on review for possible downgrade.

The TPI for this programme is being re-assessed in light of the proposed structural enhancement.

- Residential Mortgage Covered Bonds issued by Principality Building Society:

Aaa; remains on review for possible downgrade. Previously on 16 April 2009 placed on review for possible downgrade.

The TPI for this programme is being re-assessed in light of the proposed structural enhancement.

- Residential Mortgage Covered Bonds issued by Skipton Building Society:

Aaa; remains on review for possible downgrade. Previously on 16 April 2009 placed on review for possible downgrade.

The TPI for this programme is being re-assessed in light of the proposed structural enhancement.

- Residential Mortgage Covered Bonds issued by Standard Life Bank plc.

Aaa; remains on review for possible downgrade. Previously on 16 April 2009 placed on review for possible downgrade.

The TPI for this programme is Probable.

The rating actions follow negative rating actions taken on the covered bonds on 16 April, which in turn followed the downgrades of the senior unsecured ratings of the issuers.

Under Moody's rating methodology for Covered Bonds, the rating assigned to Covered Bonds may be constrained by the combination of the credit strength of the issuer and the TPI for the covered bonds. For further details, please see "Timely Payment in Covered Bonds following Sponsor Bank Default".

The Covered Bonds issued by Chelsea Building Society have been downgraded to A1. Moody's notes that the TPI of Probable assigned to this programme and the Baa3 senior unsecured rating of the Issuer, mean that the rating of the covered bonds is constrained at A1. The Issuer has not engaged in a restructuring of the programme. This rating is no longer on review.

The Covered Bonds issued by Yorkshire Building Society have been downgraded to Aa1. The Issuer has proposed a substantial restructuring of the programme, in particular to mitigate the risks of cash flow disruption following Issuer default. However, at present, the Covered Bonds remain exposed to material refinancing risk. Moody's has therefore confirmed that given this material refinancing risk and the fact that Yorkshire will remain asset swap counterparty, a TPI of Probable should be assigned to the programme. Given the Baa1 senior unsecured rating of the Issuer, the rating of the covered bonds is constrained at Aa1. This rating is no longer on review.

Moody's notes that the review for the covered bonds issued by Norwich &Peterbrough, Newcastle, Principality and Skipton is continuing as the Issuers have proposed implementing structural enhancements which would have a positive impact on the TPI assigned to these programmes. This would allow the covered bonds to retain their Aaa ratings. In its rating analysis, Moody's values the proposals and restructuring efforts demonstrated by the Issuers and expects the programme modifications to be implemented in the coming weeks.

The proposed structural enhancements to the programmes of Norwich & Peterborough Building Society and Newcastle Building Society would include the appointment of a standby cash manager, the replacement of the Servicer at a certain rating trigger, the pre-funding of coupon payments and hedging of fixed rate assets with an external swap counterparty. The combined effect of these proposals would reduce the risk of disruption to timely payments on the Covered Bonds following a default by the Sponsor Bank.

The proposed structural enhancements to Principality Building Society's Covered Bonds would include the removal of residual refinancing risk by adopting a pass-through structure on the covered bonds in the scenario of an Issuer default, the appointment of a stand-by cash manager and stand-by servicer subject to a certain rating trigger and the pre-funding of coupon payments. The combined effect of these proposals would be to reduce the risk of disruption to timely payments on the Covered Bonds following a default of the Sponsor Bank.

The proposed structural enhancements to Skipton Building Society's Covered Bonds would include the removal of refinancing risk by adopting a pass-through structure on the covered bonds in the event of an Issuer default, the appointment of a stand-by cash manager and a stand-by servicer at a certain rating trigger and the pre-funding of coupon payments. As swap replacement triggers have been breached and while the Issuer is discussing with potential replacement swap counter parties, a detailed cash flow analysis has been performed to ensure a minimum over-collateralisation would be available to cover potential interest mismatches arising in this transition period. The combined effect of the restructuring proposals would reduce the risk of disruption to timely payments on the Covered Bonds following a default by the Sponsor Bank.

The review of the covered bonds issued by Standard Life Bank PLC is continuing as the review on the issuer's senior unsecured rating is still ongoing.

Moody's will publish a further press release in the near future to update market participants on the completion of the restructuring engaged by the Issuers on their programme or following any rating action on the Issuers' senior unsecured ratings.

Moody's initially analysed and monitors these transactions using the rating methodology for EMEA Covered Bond transactions as described in the Rating Methodology reports "Moody's Rating Approach to European Covered Bond", published in June 2005, "Timely Payment in Covered Bonds following Sponsor Bank Default", published in March 2008 and "Assessing Swaps as Hedges in the Covered Bond Market", published in September 2008.

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
Managing Director
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's downgrades covered bonds of two UK Issuers; continues review of five other programmes
No Related Data.
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