Fitch today (Thursday) assigned an expected AAA rating to mortgage covered bonds that New Zealand’s Kiwibank can issue off a new programme it is setting up. The rating action comes as draft legislation moves through the country’s parliament, having recently been read a second time.

Kiwibank can issue covered bonds up to NZ$3bn (Eu1.9bn) under its programme, according to Fitch, which rates the issuer AA. The rating agency assigned a Discontinuity Cap of 2 (high) to the programme.

The initial cover pool consists of 2,308 first ranking New Zealand residential mortgage loans with a total outstanding balance of NZ$315.8m. Fitch has taken into account in its analysis an asset percentage of 88.4%.

Kiwibank is establishing a programme as draft covered bond legislation is making its way through New Zealand’s parliament. A second reading of the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill was completed last Wednesday (27 February), and the bill has gone to committee stage before a third reading.

Kiwibank’s programme will be contractual based given that legislation is yet to be passed, with Fitch noting that the proposed legal structure of registered covered bonds under the legislation mirrors the structure of existing covered bond programmes in New Zealand, and also that of Kiwibank’s.

The rating agency could revise the credit given to the systemic alternative management component of its Discontinuity Cap (D-Cap) as a result of implementation of legislation and associated regulations, but said that if the framework sticks to the proposed format a change of the D-Cap component score is unlikely.