London, 01 October 2010 -- Moody's Investors Service has today upgraded the ratings of the following
covered bonds issued by Bradford and Bingley plc (B&B):
- Mortgage covered bonds: upgraded to Aa1; previously
on 11 June 2009, upgraded to Aa2 on review for possible upgrade.
RATINGS RATIONALE
Today's rating action follows Moody's upgrade of B&B's senior
unsecured debt and deposit ratings to Aa3/P-1 from A2/P-1
(see press release published on 28 September 2010 on www.moodys.com).
As of today, the covered bond programme has a minimum over-collateralisation
level of 20.0 % (or 83.3% Asset Percentage),
which is consistent with a Aa1 rating on an expected loss basis.
All the covered bonds benefit from two layers of protection by having
recourse to both B&B and a collateral pool. The ratings therefore
take into account the following factors:
(i) The credit strength of the B&B, currently rated Aa3;
(ii) The credit quality of the cover pool. The mortgage covered
bonds are backed by residential mortgage loans.
The other key factors characterising these covered bonds are as follows:
(iii) The commitment of the issuer to maintain over-collateralisation
of 20.0%, which Moody's considers "committed".
(iv) 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 12 months.
Moody's has also lowered the Timely Payment Indicator (TPI) to "Improbable"
from "Probable". This TPI of "Improbable"
does not currently constrain the ratings on the covered bonds.
This TPI is based on the assessment of how likely the covered bonds are
to receive timely payment, if B&B defaults. When considering
the TPI, Moody's took into account: (i) the role of
the UK government in its support of the issuer; and (ii) the quality
of cover pool assets. If B&B defaults, Moody's
believes that the liquidity environment would be particularly difficult
as the default itself would mean that this government-owned issuer
would have failed to meet all its payment obligations. It may therefore
find it difficult to raise funds.
Furthermore, the environment following issuer default would be negatively
impacted by the type of collateral backing the cover pool. Compared
with other UK-based covered bond programmes, Moody's
considers the credit quality of the assets in the cover pool to be below
average, illustrated by the published Collateral Scores for UK covered
bond transactions. The latest published Collateral Score for this
transaction is 16.2%, while the average Collateral
Score for UK programmes (as of Q1 2010) is 7.0%.
The reasons for the relatively high Collateral Score are the high percentage
of buy to-let and interest-only loans in the Cover Pool.
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.
The Aa1 ratings assigned to the existing covered bonds are expected to
be assigned to all subsequent covered bonds issued by the issuers under
these programmes and any future rating actions are expected to affect
all such covered bonds. If there are any exceptions to this,
Moody's will, in each case, publish details in a separate
press release.
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 a default of the issuer.
The Cover Pool Losses for this programme are 28.3%.
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 17.4% and Collateral Risk of 10.9%.
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 cover pool assets.
Collateral Risk is derived from the Collateral Score, which for
this programme is currently 16.2%.
TPI FRAMEWORK: Moody's assigns a 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 resilience of a covered bond rating largely depends on the credit
strength of the issuer.
The number of notches that an 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 "Improbable",
the TPI Leeway for these programmes is two notches, meaning that
the issuer rating would need to be downgraded to A3 before the covered
bonds are downgraded, all other things being equal.
A multi-notch downgrade of the covered bonds might occur in certain
circumstances, such as (i) a sovereign downgrade that negatively
affects both the issuer's senior unsecured rating and the TPI;
(ii) a multi-notch downgrade of the issuer; or (iii) a material
reduction in the cover pool's value.
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 Performance Overview published
by Moody's and are subject to change over time.
The principal methodology used in rating the issuer's covered bonds
is "Moody's Rating Approach to 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. 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.
Bradford & Bingley plc, which is headquartered in Bingley,
Yorkshire, England, had assets of GBP46.6 billion as
of June 30, 2010.
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 Moody's Investors
Service information, confidential and proprietary Moody's
Analytics' 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 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.
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
Moody's upgrades Bradford & Bingley's covered bonds
