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Rating Action:

Moody's reviews Royal Bank of Scotland's Aaa covered bond ratings for downgrade

05 Jul 2013

Announcement follows review of the issuer's ratings

London, 05 July 2013 -- Moody's Investors Service has today placed on review for downgrade the Aaa-rated mortgage covered bonds issued by Royal Bank of Scotland plc (RBS; deposits A3 on review for downgrade, standalone bank financial strength rating D+/baseline credit assessment baa3, on review for downgrade). This announcement is prompted by Moody's review for downgrade of RBS's A3 long-term senior unsecured rating.

RATINGS RATIONALE

Moody's placed the A3 senior debt rating of RBS on review for downgrade, reflecting the further uncertainty of a possible break up of RBS and how this could be achieved. For further information please refer to "Moody's places Royal Bank of Scotland's ratings on review for downgrade" published on 5 July 2013.

During the review of the covered bonds, Moody's will consider the negative rating impact in two steps: an expected loss analysis and a TPI framework analysis.

(a) EXPECTED LOSS

As the credit strength of the issuer is incorporated into Moody's expected loss methodology, any 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 this programme are 24.0%, which is an estimate of the losses Moody's currently models in the event of issuer default. Moody's splits cover pool losses between market risk of 20.6% and collateral risk of 3.4%. 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 5.0%.

The over-collateralisation (OC) in the cover pool is 59.6%, of which 34.5% is provided on a "committed" basis. The minimum OC level that is consistent with the Aaa rating target is 33.0%. These numbers show that Moody's is not relying on "uncommitted" OC in its expected loss analysis.

All numbers in this section are based on the most recent Performance Overview reporting as of 31 March 2013.

(b) TPI FRAMEWORK

The TPI will limit the covered bond ratings if Moody's downgrades the senior unsecured rating of RBS below a certain level. Based on the current TPI of "Probable", if the senior unsecured long-term rating A3 of RBS is downgraded by one notch, the covered bond ratings would also be downgraded.

Moody's expects to maintain the review pending (1) the final rating action on, or confirmation of, the issuer's rating; and (2) a determination of OC levels consistent with any downgraded issuer rating, in conjunction with the issuers' willingness to provide further OC where applicable.

KEY RATING ASSUMPTIONS/FACTORS

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. 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. However, Moody's says that 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 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 Moody's and are subject to change over time.

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.

Sang Shin
Vice President - Senior Analyst
Structured Finance Group
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

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

Moody's reviews Royal Bank of Scotland's Aaa covered bond ratings for downgrade
No Related Data.
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