Action follows downgrade of the issuer's ratings
Madrid, September 09, 2013 -- Moody's Investors Service has today placed on review for downgrade
the Aaa ratings of both the regulated and the retained covered bond programmes
issued by Clydesdale Bank plc (Clydesdale; deposits Baa2 stable,
standalone bank financial strength rating D+/ baseline credit assessment
ba1)
Today's actions are prompted by Moody's downgrade of Clydesdale's
long-term senior unsecured rating.
RATINGS RATIONALE
Today's rating action follows Moody's downgrade on 23 August
2013 of Clydesdale's senior unsecured ratings to Baa2 (stable) from
A2. For more details on this action, please see Moody's
press release https://www.moodys.com/research/Moodys-downgrades-Clydesdale-Banks-senior-debt-rating-to-Baa2P-2--PR_280785.
Based on Clydesdale's current senior debt rating of Baa2,
the Timely Payment Indicator (TPI) of "Probable" assigned
by Moody's to the Clydesdale regulated covered bonds would potentially
constrain the covered bond rating at Aa2, and the TPI of "High"
assigned to the Clydesdale retained covered bonds would potentially constrain
the covered bond rating at Aa1.
Clydesdale is currently considering making various structural changes
to either or both programmes (i.e., the regulated
and retained programmes) to enhance protections for investors.
In the course of Moody's review, the rating agency will consider
any proposed changes to the programmes in order to assess the impact on
rating and TPI.
(a) EXPECTED LOSS
As Clydesdale's credit strength is incorporated into Moody's
expected loss methodology, any further downgrade of the issuer's
ratings will increase the expected loss on the covered bonds. Moody's
notes that the issuer may be able to offset any deterioration in the expected
loss analysis by adding further collateral to its programme.
The cover pool losses for the regulated programme are 22.5%.
This is an estimate of the losses Moody's currently models if Clydesdale
defaults. Moody's splits cover pool losses between market risk
of 18.2% and collateral risk of 4.3%.
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 6.5%.
The cover pool losses for Clydesdale's retained programme are 19.7%.
This is an estimate of the losses Moody's currently models if Clydesdale
defaults. Cover pool losses are split between market risk of 11.6%
and collateral risk of 8.1%. The collateral score
for this programme is 12.1%.
The over-collateralisation (OC) in the cover pool for the regulated
programme is 76.5%, of which Clydesdale provides 25.8%
on a "committed" basis. The minimum OC level that is consistent
with an Aaa rating target is 19.5%.
For the retained programme, the OC in the cover pool is 71.4%,
of which Clydesdale provides 31.6% on a "committed" basis.
The minimum OC level that is consistent with a Aaa rating target is 13.5%.
In Clydesdale's regulated and retained covered bond programmes,
the aforementioned figures show that Moody's is not relying on "uncommitted"
OC in its expected loss analysis.
All figures in this Expected Loss section are based on Clydesdale's
senior unsecured rating and data as of 31 March 2013. These numbers
are subject to change after Moody's concludes its review of the
covered bond programmes.
(b) TIMELY PAYMENT INDICATOR
For Clydesdale's regulated programme -- with the TPI of "Probable"
-- the TPI framework would potentially limit the covered bonds to
a maximum achievable Aa2.
For Clydesdale's retained programme -- with the TPI of "High"
-- the TPI framework would potentially limit the covered bonds to
a maximum achievable Aa1.
The ratings assigned by Moody's address 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.
KEY RATING ASSUMPTIONS/FACTORS
Covered bond ratings are determined after applying a two-step process:
an expected loss analysis and a TPI framework analysis.
-- EXPECTED LOSS: Moody's uses its Covered Bond
Model (COBOL) to determine a rating based on the expected loss on the
bond. COBOL determines expected loss as (1) a function of the issuer's
probability of default (measured by the issuer's rating); and
(2) the stressed losses on the cover pool assets following issuer default.
-- 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 issuer's credit strength is the main determinant of a covered
bond rating's robustness.
A multi-notch downgrade of the covered bonds might occur in certain
limited circumstances, such as (1) a sovereign downgrade that negatively
affects both the issuer's senior unsecured rating and the TPI;
(2) a multi-notch downgrade of the issuer; or (3) 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 covered bond
programmes rated by Moody's please refer to "Moody's
EMEA Covered Bonds Monitoring Overview", published quarterly.
RATINGS METHODOLOGY
The principal methodology used in this rating was "Moody's
Approach to Rating Covered Bonds", published in July 2012.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Miguel Lopez Patron
Associate Analyst
Structured Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's reviews Clydesdale's regulated and retained covered bonds for downgrade
