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TEXT-Fitch on global covered bonds rating criteria
May 30, 2012 / 4:02 PM / 5 years ago

TEXT-Fitch on global covered bonds rating criteria

(The following statement was released by the rating agency)	
    Link to Fitch Ratings' Report: Exposure Draft: Covered Bonds Rating Critera	
May 30 - Fitch Ratings has published an exposure draft with respect to its
criteria for analysing covered bonds, which includes a number of proposed
amendments to existing criteria. 	
Fitch invites feedback on the proposals during a six-week consultation period 	
that will expire on 12 July 2012. The agency will continue to apply its current 	
criteria until the finalisation of the revised criteria, which Fitch expects to 	
publish in August 2012 following the review of comments received during the 	
consultation period.	
Some of the proposed amendments are intended to simplify and further increase 	
transparency of Fitch's covered bond rating process, while others reflect 	
updated views of systemic risk and cover pool liquidity. These latter 	
enhancements are based on observations and analysis of sector performance since 	
the last major criteria update in 2009. 	
The main proposals upon which feedback will be sought are:	
-- Introduction of Discontinuity Caps (D-Caps)	
Fitch proposes to simplify its 'discontinuity' framework that addresses the 	
likelihood of covered bonds surviving an issuer default without an interruption 	
of payments. The agency is proposing D-Cap categories to replace the current 	
Discontinuity Factor (D-Factor) framework to better reflect its qualitative 	
analysis. D-Caps between 0 and 8 will correspond to the maximum notch uplift 	
from the Long-term Issuer Default Rating (IDR) to the covered bond rating on a 	
probability of default (PD) basis.	
-- D-Caps to be driven by weak link	
Unlike D-Factors, which are based on a weighted view of their components, Fitch 	
proposes that D-Caps be driven by the highest risk component. Fitch will publish	
the qualitative discontinuity risk assessment for each component. This change in	
criteria will increase transparency by highlighting any perceived weaknesses 	
within the components. It will also ensure that a major weakness in any crucial 	
component will become the key driver of Fitch's rating.	
-- Revised assumptions for mortgage cover pool liquidity	
Under the current D-Factor approach, for most mortgage programmes, an issuer 	
with a minimum IDR of 'BBB+' could achieve a 'AAA' covered bond rating. Fitch 	
proposes that a D-Cap of 4, which will be in line with moderate risk, should be 	
the best assessment to apply to current non-pass through mortgage programmes. 	
This will increase the minimum IDR to 'A-' to achieve a 'AAA' covered bond 	
rating. The change is driven by the continued lack of precedents for mortgage 	
liquidations, particularly following an issuer default, and the view that a 	
'BBB' category IDR can be too volatile to support the expected stability of a 	
'AAA' rating.	
-- Approach for assessing systemic issues established	
Fitch proposes that the liquidity gap D-Cap component be formally driven by the 	
sovereign rating, alongside other systemic indicators. If a programme is 	
substantially exposed to local assets that would need to be monetised to repay 	
covered bondholders post issuer default, sovereign ratings in the category 'A' 	
and below are likely to lead to lower D-Caps. Fitch proposes to cap covered bond	
ratings at six notches above the sovereign rating, in line with its structured 	
finance criteria.	
-- Ratings impact 	
Programme types most likely to be impacted by Fitch's proposed changes include: 	
non pass-through mortgage programmes with issuers rated 'BBB+' or below and 	
programmes likely to be assigned D-Caps of 1 or 2, which are in line with very 	
high or high discontinuity risk.	
The following 22 programmes (18% of the agency's covered bond ratings) would 	
likely see their ratings downgraded by one or two notches, if the proposed D-Cap	
categories, the weak link approach and the inclusion of sovereign risk were 	
incorporated into the criteria. For these programmes, ratings would be capped at	
a maximum achievable rating that is below the current covered bond rating. 	
The list is based on a preliminary review of Fitch's covered bond ratings and 	
the cases that the agency expects would be most likely affected by a downgrade. 	
Further analysis will be performed when any final criteria are applied to all 	
ratings, which could lead to a higher or lower number of rating actions. 	
Aareal Bank AG, mortgage programme (mortgage), 'AAA'	
Banca Carige, mortgage, 'AA' Rating Watch Negative (RWN)	
Banca Monte dei Paschi di Siena SpA, mortgage, 'AA' RWN	
Banca Popolare di Milano, mortgage, 'AA' RWN	
Banco Guipuzcoano, mortgage, 'AA-' RWN	
Banco Mare Nostrum S.A., mortgage, 'AA-'	
Banco Popolare, mortgage, 'AA' RWN	
Barclays Bank PLC, public sector programme, 'AAA'	
Caja Laboral Popular, mortgage, 'AA-' RWN	
Cajamar Caja Rural, Socieded Cooperativa de Credito (Cajamar), mortgage, 'AA-' 	
Credito Emiliano S.p.A., mortgage, 'AA+' RWN	
DEPFA ACS Bank, public sector, 'AAA' RWN	
Deutsche Pfandbriefbank AG, mortgage, 'AA+'	
NIBC Bank N.V., mortgage, 'AAA'	
Northern Rock (Asset Management) plc, mortgage, 'AAA'	
SNS Bank N.V., mortgage, 'AAA'	
UniCredit S.p.A, mortgage, 'AA+' RWN	
Unione di Banche Italiane Scpa - UBI Banca, mortgage, 'AA+' RWN	
Unnim Banc, S.A., mortgage, 'A-' RWN	
Wuestenrot Bank AG Pfandbriefbank, mortgage, 'AAA'	
Yorkshire Building Society, mortgage, 'AAA'	
Additional ratings could also be downgraded for reasons other than the proposed 	
changes to the discontinuity analysis. For example, ratings have not been 	
included in the above list if the maximum achievable rating would not be capped 	
by the proposed discontinuity analysis but the programme may need additional OC 	
to maintain the current rating if two notches recovery uplift would be necessary	
to reach the current rating versus one notch currently. 	
After the consultation period and upon the publication of the updated criteria, 	
Fitch would expect to place on Rating Watch Negative (RWN) those ratings that 	
could not be maintained based on the then applicable criteria and current 	
characteristics of the programmes, such as liquidity measures, 	
overcollateralisation (OC) levels and public OC statements. Fitch would expect 	
to receive feedback from issuers within one month from the date of criteria 	
publication regarding any plans to change their programmes. If no changes are 	
proposed, Fitch would expect to downgrade ratings after this period. If changes 	
likely to impact the rating are proposed, Fitch will review any implementation 	
plans to determine if RWN should be maintained. Once the changes are 	
implemented, if they address the drivers of a potential downgrade, the ratings 	
would be affirmed. 	
Fitch has also re-published its current covered bonds rating criteria alongside 	
the exposure draft. The current covered bonds rating criteria remains unchanged 	
with the exception of a specification that the criteria is currently under 	
review and subject to consultation. 	
 (Caryn Trokie, New York Ratings Unit)

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