[SINGAPORE] Fitch Ratings has assigned a 'AAA(EXP)' rating with Stable Outlook to DBS Bank's inaugural series of mortgage covered bonds to be issued from its programme, which complies with the requirements under the Monetary Authority of Singapore's Notice 648.
This is the first covered bond programme established in Singapore. Under this programme, DBS can periodically issue up to USD10bn of bonds, which are secured by a dynamic pool of Singapore residential mortgage loans.
KEY RATING DRIVERS
The 'AAA(EXP)' rating is based on DBS's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3; and the asset percentage (AP) to be disclosed in the issuer's investor report, which is expected to be equal to or lower than Fitch's breakeven AP for a 'AA+' rating of 85.5 per cent. The Outlook on the covered bonds reflects the Stable Outlook on DBS's IDR.
The D-Cap of '3' reflects Fitch's "moderate high" discontinuity risk assessment related to the liquidity gap and systemic risk, systemic alternative management, and the cover pool-specific alternative management components. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch believes that a successful sale of the cover assets would be possible within the extendible maturity of 12 months expected for a soft bullet issuance or within the 12-month pre-maturity test for a hard bullet issuance, which is envisaged in the documentation to make timely payments on the covered bonds. The liquidity gap and systemic risk assessment also reflects that Singapore is a nascent covered bond market. The systemic alternative management assessment addresses the significant roles performed post issuer default by the covered bond guarantor, or third parties acting on its behalf. The cover-pool specific alternative management assessment addresses both the quality and quantity of the data provided by the issuer and its IT systems.
The 'AAA' breakeven AP of 85.5 per cent, corresponding to a breakeven overcollateralisation (OC) of 17 per cent, is driven by the asset disposal loss of 19.1 per cent, reflecting the maturity mismatches in the programme upon issuance and the refinancing assumptions applied to Singaporean residential mortgages. This is followed by, the cover pool's credit loss of 4.2 per cent in a 'AAA' scenario and finally the cash flow valuation component, which reduces the OC by 4.9 per cent due to the excess spread under the programme based on a stressed weighted average (WA) life of the assets versus the liabilities expected to be issued from the programme. The breakeven AP considers whether timely payments are met in a 'AA' scenario and tests for recoveries given default of at least 91 per cent in a 'AAA' scenario.
As at 9 May 2015, the cover pool consisted of 5,988 prime Singapore private residential mortgage loans equating to SGD4.7bn. The portfolio has a WA loan to value ratio (LVR) of 58.4 per cent and is 47 months seasoned. By current balance, 37.8 per cent of the loans in the pool are for investment purposes and 35.7 per cent of the loans are held by non-Singaporeans (including borrowers with permanent residency and borrowers holding Singapore employment passes). The cover pool comprises loans secured by condominiums (79.5 per cent), detached houses and other landed properties (6.9 per cent), terrace houses (7.3 per cent) and apartments (6.2 per cent).
In a deviation from its APAC Residential Mortgage Criteria, the agency used a delinquency multiple of 2x on the WA frequency of foreclosure at the tested rating on a probability of default basis. In its cash flow modelling of the asset cash flows, this multiple stresses the level of loans falling delinquent in the cover pool over a period of time, curing thereafter.