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Rating Action:

Moody's upgrades Moorland's mortgage covered bonds rating to Baa1 following action on Co-Op Bank Plc

17 Aug 2018

NOTE: On September 27, 2018, the press release was corrected as follows: At the end of the press release, the second contact was changed to Juan Pablo Soriano. Revised release follows.

London, 17 August 2018 -- Moody's Investors Service, ("Moody's") has today upgraded to Baa1 from Baa2 the rating of the mortgage covered bonds issued by Co-Operative Bank Plc (Co-Op; B2 (cr) outlook stable, baseline credit assessment caa1). The covered bonds are issued under Co-Op's Moorland Mortgage Covered Bonds Programme and Co-Op is the underlying institution supporting these covered bonds.

RATINGS RATIONALE

Today's action follows the upgrade of Co-Op's counterparty risk (CR) assessment to B2(cr) from B3(cr).

The covered bonds were upgraded as a result of the impact, under Moody's Timely Payment Indicator (TPI) framework, of the upgrade to Co-Op's CR assessment. The rating assigned to Moorland's covered bonds is now constrained at an upper limit of Baa1, reflecting the combination of Co-Op's B2(cr) CR assessment and Moorland's TPI, of "Probable-High".

Under the TPI framework, Moody's has positioned the covered bond rating at Baa1 given the following factors:

(1) the high credit strength of the covered bonds indicated by our expected loss analysis;

(2) the high level of over-collateralisation (OC). The Moorland programme benefits from committed OC of 29.0%. In addition, the total level of OC in the programme as of 31 December 2017 was 97.4%; and

(3) the time remaining until the next principal payment. The expected principal payment is three years away. Co-Op has not issued covered bonds since 2011 and Moody's understands that Co-Op is not planning to issue further covered bonds in the near term. Negative pressure on the covered bond rating and TPI may likely to arise during this three year period if Co-Op's future prospects do not further stabilise; and

(4) the high level of operational de-linkage of the covered bonds from Co-Op owing to third party sub-servicing, provisions for the replacement of servicing and cash management, external bank accounts and external provision of hedging.

Please refer to: "Moody's upgrades The Co-operative Bank's long-term deposit rating to Caa1 from Caa2" August 14, 2018: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_387073.

KEY RATING ASSUMPTIONS/FACTORS

Moody's determines covered bond rating using 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 probability that the issuer will cease making payments under the covered bonds (a CB anchor event); and (2) the stressed losses on the cover pool assets following a CB anchor event.

The CB anchor for each of these programmes is the CR assessment plus 1 notch. The CR assessment reflects an issuer's ability to avoid defaulting on certain senior bank operating obligations and contractual commitments, including covered bonds. Moody's may use a CB anchor of CR assessment plus one notch in the European Economic Area or otherwise where an operational resolution regime is particularly likely to ensure continuity of covered bond payments.

The cover pool losses are an estimate of the losses Moody's currently models following a CB anchor event. Moody's splits cover pool losses between market risk and collateral risk. Market risk measures losses stemming from refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks). Collateral risk is derived from the collateral score, which measures losses resulting directly from the cover pool assets' credit quality.

The cover pool losses for this programme are 15.83%. This is an estimate of the losses Moody's currently models if Co-Op defaults. Moody's splits cover pool losses between market risk of 12.48% and collateral risk of 3.35%. 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 OC in the cover pool is 97.4%, of which Co-Op provides 29.0% on a "committed" basis. The minimum OC level that is consistent with the Baa1 rating target is 2.5%. These numbers show that Moody's is not relying on "uncommitted" OC in its expected loss analysis.

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. All numbers in this section are based on data provided by the issuer as of 31 December 2017.

TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI), which measures the likelihood of timely payments to covered bondholders following a CB anchor event. The TPI framework limits the covered bond rating to a certain number of notches above the CB anchor.

When assessing TPIs for sub-investment-grade-rated issuers we place more focus on factors that may impact the current credit position of the covered bonds. In the case of Moorland, these factors included (1) credit strength indicated by our expected loss analysis (2) the current level of OC, and (3) the time to the next principal payment.

The TPI assigned to this programme is "Probable-High". The TPI leeway for Moorland's mortgage covered bonds is limited, and thus any downgrade of the issuer ratings may lead to a downgrade of the covered bond ratings.

Factors that would lead to an upgrade or downgrade of the rating:

The CB anchor is the main determinant of a covered bond programme's rating robustness. A change in the level of the CB anchor could lead to a downgrade of the covered bonds. The TPI Leeway measures the number of notches by which Moody's might lower the CB anchor before the rating agency downgrades the covered bonds because of TPI framework constraints.

The TPI assigned to this programme is "Probable-High". The TPI leeway for Moorland's mortgage covered bonds is limited, and thus any downgrade of the issuer ratings may lead to a downgrade of the covered bond ratings.

A multiple-notch downgrade of the covered bonds might occur in certain circumstances, such as (1) a country ceiling or sovereign downgrade capping a covered bond rating or negatively affecting the CB Anchor and the TPI; (2) a multiple-notch downgrade of the CB Anchor; or (3) a material reduction of the value of the cover pool.

RATING METHODOLOGY

The principal methodology used in this rating was "Moody's Approach to Rating Covered Bonds" published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's did not use any stress scenario simulations in its analysis.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Julie Ng
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Juan Pablo Soriano
MD-Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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