March 13, 2014 / 2:56 PM / 4 years ago

Moody's delivers on covered bond anchor change

LONDON, March 13 (IFR) - Some 15 European banks received a welcome uplift on their covered bond ratings on Wednesday, as Moody’s confirmed a change in its methodology for assessing the instruments.

The main beneficiaries included a number of Europe’s weakest banks with covered deals from the likes of Banco Popolare di Milano moving up to Baa1 from Baa2.

The upgrade concluded a process that began in September when the agency said it wanted to change the anchor point for its covered ratings as a way of avoiding knee-jerk downgrades on the back of senior rating cuts.

The anchor point reflects the probability of an issuer ceasing to make payments on its covered bonds. Previously, a covered rating was anchored to a bank’s senior unsecured rating (SUR).

Under the changes, the anchor is either adjusted from the baseline credit assessment (BCA) plus up to two notches, or the SUR plus up to one notch, depending on how much bail-inable debt a bank has and how much extraordinary government support Moody’s assumes when it assigns a senior rating.

Moody’s said there was now sufficient certainty regarding the treatment of covered bonds - and their exemption from bail-in - in the resolution of EU banks for it to propose amending its approach.

As a result of the change, 15 covered bond programmes were upgraded, nine are on review for upgrade, and three were confirmed that were previously on review for downgrade.

Additionally, the covered bonds of a further 58 transactions now benefit from a covered bond anchor that is higher than the senior unsecured/deposit rating used prior to the methodology update, according to Bernd Volk, head of covered bond research at Deutsche Bank.

Bankers welcomed the announcement but thought that it had already been priced in by issuers.

“Overall, the new approach and the rating actions are generally positive,” said Volk.

“However, given that the new anchor approach was widely expected and taking a look at the list of impacted issuers and recent strong spread tightening, it is unlikely to have a specific market impact.”

Moody’s expects that banks that have not received a rating upgrade could do so in the future provided they increase their bail-inable debt to protect covered bondholders.

This means banks that have large amounts of outstanding senior debt will be viewed more favourably. For second tier peripheral banks that have been locked out of the senior market for much of the crisis, however, this could mean they do not benefit in the way that many would hope. (Reporting by Aimee Donnellan; Editing by Helene Durand and Julian Baker)

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