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Aaa Rating For Uk Mortgage Covered Bonds

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I was just reading a rating agency's assessment and didn't think the figures looked that good. Am I missing something?

LBS's own rating is only A but these mortgage backed bonds are AAA?

Average age of loan is 40 months so back to May 2007.

It scrapes into the 69.1% LTV by just 0.2%.

Almost 1 in 7 are BTL.

That frequency of foreclosure cannot be right can it?

Fitch Ratings-London-12 August 2010: Fitch Ratings has assigned Leeds Building Society's (LBS, rated 'A'/Stable/'F1') Series 2 mortgage covered bonds a 'AAA' rating, and affirmed the outstanding Series 1 covered bonds. LBS's second series of mortgage covered bonds has been issued under a EUR7bn programme and are guaranteed by Leeds Building Society Covered Bonds LLP, a limited liability partnership incorporated in England and Wales. The EUR50m Series 2 issuance benefits from an extended maturity date of one year following its expected maturity date of August 2015. At the same time, the issuer has redeemed GBP350m of Series 1, resulting in an outstanding amount on the series of GBP900m.

The 'AAA' rating is based on LBS's Long-term Issuer Default Rating (IDR) of 'A' and a Discontinuity Factor (D-Factor) of 15.0%, the combination of which enables the mortgage covered bonds to be rated 'AA+' on a probability-of-default (PD) basis. Over-collateralisation (OC) between the cover assets and the covered bonds is sufficient to sustain a 'AA+' level of stress. A one-notch uplift from the PD rating is credited for high expected stressed recoveries, leading to the 'AAA' rating. The programme's current contractual asset percentage (AP) is equal to the 'AAA'-supporting AP of 75.6%. The current nominal AP is 52.9%, which equates to 89.0% OC. The supporting AP will be affected, among other things, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances.

Fitch D-Factors measure the likelihood of payment interruption upon an issuer default. The D-Factor assigned to LBS's covered bonds reflects the comfort gained from the segregation of the cover assets in the bankruptcy-remote special-purpose company acting as guarantor, the issuer's robust IT systems to ensure continuity of the programme, the contractual provisions in place governing the management of the cover pool post issuer default and the oversight role of the Financial Services Authority under the UK regulated covered bond framework. The D-Factor also incorporates Fitch's assessment of the liquidity gaps that would arise in the immediate aftermath of a potential default of the issuer while the guarantee is being exercised. The cover assets are deemed to require up to 12 months for liquidation in a stressful scenario, while the covered bonds have an extendible maturity of 12 months allowing the alternative manager to sell loans during this period. LBS's cover pool is made up of UK mortgage loans originated by itself. As of end-June 2010, the pool consisted of 19,523 loans secured on residential properties, with a total outstanding balance of GBP1.8bn. The cover pool has a weighted-average (WA) original loan-to-value ratio (LTV) of 69.3%. The WA current indexed LTV, based on Fitch's approach of giving credit to 50% of any appreciation in the house price index and full consideration to any depreciation in the index, is 69.1%. The WA age of the loans is 40.5 months. The cover pool includes 13.8% of buy-to-let loans, which Fitch believes have a greater PD compared to standard owner-occupied loans. In a 'AAA' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 23.5% and a WA recovery rate of 62.8%.

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