Sydney, November 12, 2012 -- Moody's Investors Service has today assigned a definitive long-term rating of Aaa to the Series 23 covered bonds issued under the US$30 billion covered bond programme of the Commonwealth Bank of Australia ("CBA" or the "Issuer") (Aa2/Prime-1/B-). CBA issued EUR113 million Series 23 covered bonds with a 12-year hard-bullet maturity.
The covered bonds constitute direct, unconditional and senior obligations of CBA, and the payments of all amounts due in respect of the covered bonds are unconditionally guaranteed by Perpetual Corporate Trust Limited as trustee of CBA Covered Bond Trust. The covered bonds are also be secured by a pool of residential mortgage loans originated by CBA and eligible substitution assets, also known as the cover pool.
Issuer: Commonwealth Bank of Australia - Covered Bond Programme
EUR 113M Series 23, Definitive Rating Assigned Aaa
As with all covered bonds, the covered bonds will benefit from two layers of protection by having recourse to both the issuer, CBA, and a collateral pool. The provisional rating therefore takes into account the following factors:
1) The credit strength of CBA, rated Aa2.
2) The value of the cover pool. The covered bonds will be primarily backed by residential mortgage loans originated by CBA.
Other key factors:
3) The commitment of the Issuer to maintain a minimum over-collateralisation of 5.03% which Moody's views as "committed". As at 30th September 2012, the committed over-collateralisation provided was 21.80% which was in excess of minimum requirement.
4) Structure created by the transaction documents.
5) Protections provided under the Banking Amendment (Covered Bonds) Act 2011.
Moody's has assigned a Timely Payment Indicator (TPI) of "Probable" to the covered bonds.
As of 30 September 2012, the total value of the assets in the cover pool was AUD 19,048,645,814. The cover pool assets are mortgage loans secured by properties in Australia. The loans have a weighted-average seasoning of 38.5 months and weighted-average remaining term of 311 months. The weighted-average current loan to value (LTV) ratio is 60.03%.
For any hard bullet covered bonds, they will benefit from a pre-maturity test according to which CBA has to pre-fund any covered bond maturing within 12 months of the issuer being downgraded below Prime-1.
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 issuer default.
The Cover Pool Losses for this programme are 20.52%. 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 13.09% and Collateral Risk of 7.44%. 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 currently 8.5%.
TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (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.
The robustness of a covered bond rating largely depends on the credit strength of the issuer.
The number of notches by which the 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 probable the TPI Leeway for this programme is four notches, meaning the issuer rating would need to be downgraded to Baa1 before the covered bonds are downgraded, all other things being equal.
A multiple notch downgrade of the covered bonds might occur in certain limited circumstances. Some examples might be (a) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (b) a multiple notch downgrade of the issuer; or (c) a material reduction of the value of the cover pool.
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 cover pool information provided by the issuer and are subject to change over time.
The principal methodology used in this rating was Moody's Approach to Rating Covered Bonds published in July 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The rating assigned by Moody's addresses 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.
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