(Repeat for additional subscribers)
April 11 (The following statement was released by the rating agency)
Fitch Ratings has published its criteria detailing how ratings of structured finance (SF)
notes and covered bonds (CVB) are constrained by the credit quality of the sovereign to which
the SF transaction or CVB programme is exposed. The methodology is consistent with the
one presented in the exposure draft published on 22 January 2014.
The criteria provide details of Fitch's current approach to assigning SF and CVB
ratings that are higher than the relevant sovereign local currency Issuer
Default Rating (LC IDR), and outline how Fitch embeds sovereign default risk in
its rating stresses. It also details methodology applicable to ratings of
multi-jurisdictional SF notes or CVB. These criteria are applicable globally to
international scale ratings, with the exception of those jurisdictions falling
within the scope of the "Criteria for Rating Securitisations in Emerging
Fitch believes that it is not possible to completely de-link SF and CVB ratings
from the credit quality of the relevant sovereign, as a high level of sovereign
default risk raises the prospect of extreme events occurring in a country and
reduces the certainty of performance projections for SF and CVB assets. CVB are
also further affected by sovereign risk through its impact upon the issuing bank
and liquidity of the cover pool.
These criteria are not expected to affect ratings assigned to SF notes or CVB
whose securitised or cover pool assets are concentrated in a single
jurisdiction, as it reflects Fitch current global analytical practices with
respect to rating caps. Similarly, no major revision of the base case and stress
assumptions currently applied by Fitch are expected. These are expected to
incorporate sufficient cushion to withstand the risks discussed in these
criteria, including the proposed sovereign distress scenario.
In contrast, however, a limited number of ratings assigned to
multi-jurisdictional SF notes and CVB may be downgraded by one or two notches
upon implementation of the criteria. Fitch will publish the consequent rating
actions in the following weeks, if any.
As detailed in the criteria, the ratings of SF notes and CVB issued in foreign
currency cannot exceed the Country Ceiling (CC) of the country of the assets,
unless the transfer and convertibility (T&C) risk is mitigated. Where T&C risk
is mitigated, ratings cannot be higher than four notches above the CC. In
addition, Fitch SF and CVB ratings are capped at a maximum of six notches above
the sovereign LC IDR. This cap is independent of the CC-related cap and
represents an additional rating constraint reflecting the increased likelihood
of extreme macroeconomic events and significant adverse events occurring (e.g.
political interference in the economy), which Fitch associates with a high level
of sovereign default risk.
In all cases where SF notes or CVB are rated above the sovereign LC IDR, Fitch
expects the credit protection available to the notes or bonds to be sufficiently
robust to withstand the stresses resulting from a sovereign default, such that
they are not expected to default in such a scenario.
SF and CVB ratings in countries that are part of currency unions (most notably,
the eurozone) would not exceed the country's CC, which captures the risk of the
imposition of capital controls and/or an exit from the union. This is because
Fitch expects that upon an exit from the union T&C risk may not be mitigated
and/or event risks could be acute. Fitch's long standing view remains that the
departure of any country from the eurozone is unlikely and is significantly
lower than a sovereign default within it.
Due to their diversified country risk exposure, T&C risk can become a secondary
rating driver for multi-jurisdictional structures. For this reason, Fitch
applies a specific and less stringent approach where the exposure to sovereigns
with a lower CC than the SF or CVB rating is below 20%. As in the case of
single-jurisdiction SF transactions or CVB, exposure to macroeconomic and/or
event risks is analysed separately and may lead to rating caps if material,
regardless of the T&C risk assessment.
Market participants' feedback on the exposure draft report has been published
concurrently with the criteria report in the special report entitled, entitled
"Feedback Report: Criteria for Sovereign Risk in Developed Markets for
Structured Finance and Covered Bonds" available at www.fitchratings.com. The
"Criteria for Sovereign Risk in Developed Markets for Structured Finance and
Covered Bonds" are available on www.fitchratings.com or by clicking on the link
Link to Fitch Ratings' Report: Criteria for Sovereign Risk in Developed Markets
for Structured Finance and Covered Bonds