National Australia Bank has attained an expected AAA rating from Fitch for its forthcoming covered bonds, which are set to be the first from an Australian bank since legislation was finalised last month. NAB is currently roadshowing its programme.

“The launch of NAB’s covered bond programme sees the commencement of what is expected to be an active source of additional funding for Australia’s major banks,” said David Carroll, director in Fitch’s structured finance team.

The rating agency said that NAB can periodically issue covered bonds of up to US$20bn (Eu14.5bn/A$19.2bn) secured on a dynamic pool of first ranking Australian residential mortgage loans.

NAB, rated AA by Fitch, has been assigned a Discontinuity Factor (D-Factor) of 29.4%, the rating agency said today (Wednesday), and the combination of the issuer default rating and D-Factor enables the covered bonds to reach an expected AAA rating on a probability of default basis.

“The minimum overcollateralisation (OC) the issuer commits to in the programme documentation is sufficient to sustain this AAA level of stress,” said Fitch. “The programme’s contractual asset percentage (AP) of 84.1% (equivalent to 18.9% OC) is equal to the AP supporting the AAA(exp) rating.”

The rating agency said that, all else being equal, NAB’s covered bonds could be rated AAA if the issuer was rated at least A-.

The 29.4% D-Factor score reflects, in Fitch’s words:

• the strength of the asset segregation through a bankruptcy remote SPV, which will act as guarantor of the covered bonds
• the mitigant to liquidity gap risk in the form of a pre-maturity test, triggering the cash collateralisation of payments due over the next 12 months upon a downgrade of the issuer below ‘F1+’, or for future soft bullet issues, a 12 month maturity extension and a cash reserve covering three months of payments due on the covered bonds
• the provision for the guarantor to take decisions after issuer default, aided by the adequate quality of the issuer’s IT systems
• the oversight of the issuer under covered bond legislation recently enacted in Australia

According to Fitch, as of 21 October 2011, the cover pool comprised 7,819 loans secured by first ranking mortgages of Australian residential properties with a total outstanding balance of A$2.178bn (Eu1.648bn/US$2.267bn).