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Fitch: Modest Positive Momentum from Covered Bonds Criteria Amendments
May 12, 2014 / 2:17 PM / 3 years ago

Fitch: Modest Positive Momentum from Covered Bonds Criteria Amendments

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Covered Bonds Rating Criteria Implementation Report (10 March 2014 Criteria Update) here BARCELONA/PARIS/LONDON, May 12 (Fitch) Fitch Ratings says that following the implementation of its revised Covered Bonds Rating Criteria published in March 2014, the ratings of 11 covered bond programmes saw their Outlook being revised to Positive, 27 being revised to or remaining on Negative and 90 being revised to or remaining on Stable. One other programme is on Rating Watch Evolving and another on Rating Watch Negative. As part of its updated covered bonds analysis, the agency has assigned Long-term Issuer Default Rating (IDR) uplifts to each rated programme where applicable. The IDR uplifts result from the implementation of recent updates to Fitch's criteria to take account of the favourable position for covered bonds in the new Bank Recovery and Resolution Directive (BRRD) in the European Union and in the bank resolution framework in Switzerland. The covered bonds Rating Outlooks also take into account the relevant Negative Outlooks on banks' IDRs announced by Fitch on 26 March 2014 (see "Fitch Revises Outlooks on 18 EU Commercial Banks to Negative on Weakening Support" and "Fitch Revises Outlooks on 18 EU State-sponsored Banks to Negative on Weakening Support"). Twenty two programmes remain on Stable Outlook even though the Outlook on the respective issuer's IDR was revised to Negative due to weakening support. This is because the assigned IDR uplift is expected to compensate for any potential downgrade of a given bank's IDR to its Viability Rating (VR). Fitch will review the covered bonds ratings currently on Positive Outlook over the coming weeks, once the text of the BRRD is signed by representatives of the European Parliament and the Council of the European Union, which Fitch expects to be in mid-May. The ratings could be upgraded if the overcollateralisation (OC) taken into account by the agency provides sufficient protection for a higher rating. The ratings of all covered bonds will continue to be monitored on an ongoing basis. In the event that an issuer's (or reference issuer's) IDR is downgraded, the agency will consider whether or not the IDR uplift is sufficient to compensate for the IDR downgrade to determine the rating impact for affected covered bonds. In addition, Fitch expects its breakeven OC levels for the existing ratings to decrease for some programmes. This would apply to programmes with a Stable Outlook, if the combination of the issuer IDR (or reference IDR) and the IDR uplift leads to a covered bond rating on a probability of default (PD) basis within two - or, at speculative grade, three - notches of the current covered bonds rating. In these cases, the covered bonds can be rated under Fitch criteria based solely on recoveries given default. In such a scenario, Fitch cash flows modelling does not include stresses for a timely payment, resulting in lower breakeven OC for a given rating. Fitch will not revise breakeven OC levels for the rating of programmes on Negative Outlooks even if they could be rated based solely on recovery uplift. This is because the covered bond ratings and the basis for the ratings may change if the banks' IDRs are subsequently downgraded. Of a total of 130 programmes publicly rated by Fitch on the international rating scale, 92 were eligible for an IDR uplift. Forty programmes had an IDR uplift of 2, 29 had an IDR uplift of 1 and 23 had an IDR uplift of zero. While this last group were eligible for an IDR uplift due to their exemption from bail-in, they nevertheless did not fulfil the criteria for a positive uplift. To provide greater transparency on all rating actions taken in relation to the criteria amendment, Fitch has published an excel file that contains the IDR uplift for each publicly rated programme. In this document (which is available by clicking on the link above), Fitch also discloses information relevant to the programmes' ratings, including the issuer's or reference issuer's IDR as well as its VR and Support Rating, the Discontinuity Cap, the covered bond rating on a PD basis, the covered bond rating and Rating Outlook. The IDR uplift expresses Fitch's judgement on the degree of protection in the event of a bank's resolution that would be available to prevent the source of covered bonds payments switching from the issuer to the cover pool. Most of the IDR uplifts assigned incorporate Fitch's opinion on the relative ease and motivations for resolution methods other than liquidation. Other factors taken into account are the importance of covered bonds to the financial markets in a given jurisdiction and the extent of buffer offered by senior unsecured debt. The revision of Fitch's Covered Bonds Rating Criteria reflects the beneficial position for covered bonds under bank resolution frameworks, most notably, the BRRD, which was voted by the European Parliament on 15 April 2014 and by the Council of the European Union on 6 May 2014. The BRRD exempts regulated covered bonds from bail-in in the event of bank resolution. Contacts: Carmen Munoz Senior Director +34 93 323 8408 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Helene Heberlein Managing Director +33 1 44 29 9129 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, Covered Bonds Rating Criteria (10 March 2014), is available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Feedback Report: Covered Bond Rating Criteria Change here 2014 Outlook: Covered Bonds here Impact of European Banking Union on Banks - Amended here The Evolving Dynamics of Support for Banks here Bank Support: Likely Rating Paths here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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