The Covered Bond Report

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Dozen get triple-As in first Scope ratings, without cover benefit

Scope has rated the covered bonds of 12 issuers AAA, on stable outlook, in its first ratings for the asset class. It cited covered bonds’ preferential status, “unparalleled” track record, and “immense” institutional support when announcing the ratings yesterday (Tuesday), although they do not take into account cover pool analyses.

Scope headquarters imageThe AAA ratings take in issuance from 17 programmes of nine major European banking groups:

- Banco Santander SA (A+ Issuer Credit Strength Rating): cédulas hipotecarias and cédulas territoriales

- BBVA SA (A): cédulas hipotecarias and cédulas territoriales

- BNP Paribas SA (A+): BNP Paribas Home Loan SFH obligations d’habitat and BNP Paribas Public Sector SCF obligations foncières

- BPCE SA (A+): BPCE SFH obligations d’habitat

- Commerzbank AG (A-): Öffentliche Pfandbriefe and Hypothekenpfandbriefe

- Danske Bank A/S (A-): særligt dækkede obligationer (SDO) issuance from pools C, D and I

- Deutsche Bank AG (A-): Hypothekenpfandbriefe

- Crédit Agricole Group (A): Crédit Agricole Home Loan SFH obligations d’habitat and Crédit Agricole Public Sector SCF obligations foncières

- Société Générale SA (A): Société Générale SFH obligations d’habitat and Société Générale SCF obligations foncières

The ratings cover 340 issues totalling Eu220bn, Scope said.

According to Karlo Fuchs, head of covered bond ratings at Scope, those included in the initial ratings were selected on the basis of being among 28 banks that Scope rates on an issuer basis, being from five jurisdictions it announced analyses of at the end of July, and not being issuance via subsidiary banks (such as in Sweden, for example).

Bernd Volk, head of covered bond and agency research at Deutsche Bank, said that it appears Scope is working hard to establish a covered bond track record.

“Without it, the ECB seems unwilling to accept Scope ratings, which in turn makes it difficult for Scope to establish a track record,” he added.

All but two of the covered bond programmes can benefit from six notches of uplift over the issuer ratings under Scope’s methodology, as detailed by the rating agency in July – cédulas territoriales can benefit from five notches.

“The ratings are driven by the Issuer’s Credit Strength Rating (ICSR) as the fundamental anchor for the covered bond analysis,” Scope said yesterday. “In addition, the ratings reflect the extent to which covered bonds benefit from particular legal and resolution frameworks.

“According to Scope’s methodology these fundamental factors are so critical they can enhance the rating of covered bonds by up to six notches above the issuer’s rating.”

Scope said that most of the covered bonds could maintain their ratings if the issuer were downgraded by one notch.

“Further rating stability is expected to be provided by the cover pool analysis, which may enhance the ratings by three additional notches,” it added. “Such additional uplift has not yet been factored into the below ratings.”

The ratings are based on public information, said Scope, and were not solicited by the issuers, who also did not participate in the rating process.

Fuchs said that should an issuer be downgraded to the extent that its covered bond rating is not sustainable at AAA solely on the basis of the five or six notches of fundamental uplift it enjoys, the rating agency would consider whether the covered bond rating could benefit from additional notches of support from the cover pool. He said issuers may decide to provide further information that would make the full uplift possible.