RPT-Fitch: Covered Bonds Ratings Less Sensitive to Issuer Downgrades
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May 30 (Reuters) - (The following statement was released by the rating agency)
In its latest Covered Bonds Surveillance Snapshot, Fitch Ratings reveals that covered bonds ratings could withstand a downgrade of their issuer by two notches on average. The cushion against downgrades of Issuer Default Ratings (IDR) increased by one notch following the implementation of Fitch's updated covered bonds criteria on 10 March 2014, which recognises the privileged position of covered bonds under bank resolution regimes. At the same time, the proportion of IDRs on Negative Outlooks has increased among issuers of covered bonds rated by Fitch, to 42% from 16% earlier this year, due to weakening state support.
The reduced sensitivity of covered bonds ratings to potential IDR downgrades is a direct consequence of the assignment of IDR uplifts to programmes where covered bonds are exempt from bail in, and where Fitch considers the likelihood of an enforcement of the security against the cover pool in the event of a bank default has reduced. In total, we have incorporated 109 notches of IDR uplifts into our covered bonds analysis, with 40 programmes benefiting from an IDR uplift of 2, and 29 programmes benefiting from an IDR uplift of 1. Despite this larger cushion, the perspective for covered bond ratings has only improved modestly, with 11 ratings on Positive Outlook, as the potential downgrade of a support-driven IDR is not always compensated by IDR uplifts.
Overall, 27% covered bonds programmes rated by Fitch on the international scale would be vulnerable to a one-notch downgrade of the corresponding IDR, down from 45% last quarter. Similarly, the number of covered bonds ratings at a risk of downgrade upon a two or three notch downgrade of the corresponding IDR has reduced to 13% from 20% and to 8% from 15%, respectively. This sensitivity analysis is a mechanical application of Fitch's Discontinuity Cap to a lower IDR, taking into account the IDR uplift and assuming the maximum credit for recoveries given default under Fitch's criteria.
As of 30 April 2014, Fitch rated 132 covered bonds programmes in total, issued out of 21 countries. Most of them were secured by traditional assets eligible to covered bonds funding, such as mortgage loans (83%) and public sector debt (15%). About 59% of the portfolio carried a 'AAA' rating, and less than 5% was speculative-grade.
Fitch's covered bonds surveillance snapshot presents an overview of all programmes rated by the agency on the international scale, recaps on recent rating actions and provides insight on rating steps such as the issuer rating, the IDR uplift, the D-Cap and the breakeven overcollateralisation for the rating. It also contains issuance statistics and lists topical covered bonds research recently published by Fitch as well as reports on criteria applied by the agency. It is published jointly with an Excel document summarising the key characteristic and credit metrics for each covered bonds programme. Both are available on www.fitchratings.com or by clicking on the link below.
Link to Fitch Ratings' Report: Covered Bonds Surveillance Snapshot - PDF