May 28, 2015 / 11:13 AM / 2 years ago

Limited Covered Bond Rating Impact from Bank Support Actions

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Limited Covered Bond Rating Impact from Bank Support Actions here LONDON, May 28 (Fitch) Fitch says that there has only been a limited impact on its covered bond ratings following bank rating downgrades on 19 May 2015 in relation to the reduced likelihood of sovereign support for commercial banks in the EU, US, Switzerland and Hong Kong. (See "Fitch Takes Rating Actions on European and US Banks on Support Revision" on 19 May 2015 and the special report "Sovereign Support for European Banks" on 22 May 2015). 29 covered bond issuers or reference issuers were among the banks that saw downgrades of their Long-Term Issuer Default Ratings (IDR) as a result of bank support revisions, with these issuers maintaining 38 covered bond programmes that are rated by Fitch. Of these 38 programmes, only 12 saw their ratings downgraded, with one placed on Rating Watch Negative (RWN), while the remaining 25 programmes were unaffected. However, Fitch continues to review counterparty exposures to the downgraded banks to assess whether increase in counterparty risk will adversely affect programme ratings. For a full list of the impact on the ratings of covered bond programmes from bank Long-Term IDR downgrades for support reasons, please refer to the attached report "Status Report on Covered Bond Programmes Following Bank IDR Downgrades on Fitch's Support Revision." Of the 25 programmes unaffected by the bank rating actions, 13 benefitted from the cushion provided by the IDR uplifts assigned by Fitch in 2014 (See Rating Action commentary Fitch: Modest Positive Momentum from Covered Bond Criteria Amendments, published on 12 May 2014); a further nine from the combination of IDR uplifts and cushion against IDR downgrade in the programme's Discontinuity Cap (D-Cap); for one programme, the assigned D-Cap alone provided sufficient cushion against the IDR downgrade; and two programmes are guaranteed and their rating is linked to the guarantor's rather than the issuer's rating. The 29 covered bond issuers or reference issuers that were downgraded saw an aggregate of 81 notches downgraded to their IDRs, whereas the covered bonds of these issuers were only downgraded by 21 notches in aggregate. The 12 downgraded programmes are from issuers located in Ireland, Portugal, Spain, Italy and Poland. Most programmes were downgraded by one notch, with the maximum downgrade equal to one rating category. While five issuers or reference issuers were downgraded to non-investment grade category, only one covered bond programme was downgraded to non-investment grade. Of the total of 14 programmes which were on Negative Outlook for issuer support reasons prior to the review, six are now on Stable Outlook, four on Positive Outlook, two on RWN, one on Rating Watch Positive, following their downgrade, while one was affirmed and now has a Stable Outlook. The affirmed programme rating from Banca Popolare di Milano is not included in the status report as the issuer was not downgraded for support reasons (its Viability Rating was upgraded to 'bb+' and Long-Term IDR affirmed at 'BB+'). The Liquidity Gap and Systemic risk component for Italian Obbligazioni Bancarie Garantite (OBG) mortgage programmes that comprise primarily Italian residential mortgage loans and benefit from a 12 to 15 months maturity extension was revised to '2' from '1'. This is driven by Fitch's assessment of an improvement in the liquidity and funding profile of the Italian banking system, with a functioning secured interbank market and reduced, albeit still high, reliance on ECB facilities. It is also supported by the growing size of the covered bonds market, and the increased number of issuers having established covered bonds programmes that could fund potential portfolio acquisition and a lower proportion of retained issues compared to the 2011-2014 period. As a result the mortgage covered bond programmes of Banca Monte dei Paschi di Siena SpA, and Banca Carige S.p.A.- Cassa di Risparmio di Genova e Imperia Siglabile saw a more limited downgrade than if the D-Cap had remained at '1'. (see "Fitch Updates Covered Bond Mortgage Liquidity & Refinancing Stress Addendum" dated 20 May 2015 and "Fitch Takes Various Actions on 9 Italian OBG Programmes" dated 22 May 2015). For those issuers or reference issuers whose IDR was based on the bank's VR, their IDRs were not affected by the downgrade of their Support Ratings and Support Rating Floors. Fitch covered bond ratings are linked to their issuers' or reference issuers' IDR given their dual recourse nature and because assets and liabilities are dynamic and ratings can be affected by an issuer's decisions regarding cover pool composition, asset/liability mismatches and maintenance of overcollateralization (OC). The covered bond rating starts from the IDR of the issuer or reference issuer and can exceed the IDR by a total number of notches corresponding to the sum of the IDR uplift, the D-Cap and the credit for recovery applicable to the programme. However, the actual covered bond rating may be lower, at a rating level corresponding to the stress scenario that can be withstood taking into account the OC level that Fitch gives credit to in its rating analysis. 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: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available at www.fitchratings.com. Related Research Global Structured Finance & Covered Bonds Rating Criteria Hierarchy [754431 - 01-AUG-2014] here 2015 Outlook: Covered Bonds [832628 - 05-DEC-2014] here Feedback Report: Covered Bond Rating Criteria Change [738918 - 10-MAR-2014] here Sovereign Support for European Banks [866117 - 22-MAY-2015] 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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