LONDON Feb 4 Credit ratings for more than half
of Europe's covered bond programmes could come under pressure
from proposed changes to the way Standard & Poors rates these
securities, the rating agency said on Wednesday.
S&P wants to put more emphasis on the ability of covered
bonds to gain access to liquidity to repay investors in the
event of a default by the issuer.
"If implemented, we estimate that approximately 60 percent
of the programmes by number would not meet the proposed minimum
rating guidelines for covered bond issuers," S&P said.
A large number of the bonds would have to increase their
"overcollateralisation" (assets in excess of liabilities) to
maintain current ratings, S&P said.
Failure to do so could result in further negative rating
"Going forward, if the proposals are implemented, the
covered bond ratings would be more linked to the issuers
rating," said Karen Naylor, head of European covered bond
ratings at S&P. "So should the issuer ratings come under
pressure, the bond ratings may come under pressure too."
S&P has not downgraded any covered bonds so far, she said.
Covered bonds typically get higher credit ratings than the
banks issuing them, because they are backed by assets that stay
on the issuer's balance sheet.
This means investors have a claim on the bank itself and a
priority claim on the assets as well. For this reason, more than
80 percent of these bonds are rated at triple-A.
If there is a default, the bonds have to be repaid from the
assets backing it.
In current market conditions, however, S&P is concerned
about the ability of these bond programmes to sell assets if
there is a default.
"We will heighten our focus on the ability of covered bond
structures to access liquidity to repay investors when we assume
the bank becomes insolvent," Sabrina Miehs, S&P credit analyst,
said in a statement.
Most covered bond programmes may have a mismatch between the
maturities of assets and liabilities. Those with greater
maturity mismatches would have to rely more heavily on asset
sales, S&P said.
Germany is the biggest market for covered bonds, but new
issues have dried up following the bankruptcy filing of U.S.
investment bank Lehman Brothers in September last year.
There have been a small number of new deals since then, but
analysts are not expecting the market to regain its original
This year, covered bonds will be competing with increased
government bond sales and state-guaranteed bank bond programmes,
Commerzbank said in a recently published research note.
Last month, Moody's Investors Service warned that ratings of
European banks' covered bonds programmes were likely to come
under pressure this year as ratings fall for the banks
S&P has requested feedback on its proposed new system, which
was prompted by turmoil in the capital markets as a result of
the credit crisis.
(Reporting by Jane Merriman; editing by Simon Jessop)