Fitch released new covered bond counterparty criteria yesterday (Monday), but their effect on covered bond ratings will be limited and market participants contrasted their release with Standard & Poor’s parallel actions in January.

Fitch said that it will review programmes affected by the new criteria over the coming six months.

“The agency expects that application of the criteria to existing rated covered bond programmes will have an immediate effect on a limited number of covered bond ratings,” it said. “Most programmes, particularly those with internal counterparties, will only be affected if the issuer’s rating deteriorates by several notches. This is based on the expectation that issuers, notably of programmes with extended maturity for principal payments, will be able and willing to improve the liquidity protection against potential missed interest payments shortly after an issuer or account bank default.”

The rating agency said that a potential mitigant issuers may choose to increase is overcollateralisation.

“If this risk remained insufficiently mitigated, according to the new criteria, the affected programmes’ ratings would be tied more closely to the applicable Issuer Default Rating (IDR) through a largely increased Discontinuity Factor (D-Factor),” added Fitch. “This may automatically result in downgrading covered bonds’ ratings from their current level.”

The introduction of the new criteria followed an exposure draft released in October 2010.

A covered bond banker who had met with Fitch ahead of yesterday’s release and also with S&P regarding their counterparty criteria said that he felt Fitch had handled the changes to their criteria more carefully.

“Fitch said that there would be some changes given the feedback that had been made,” he said. “They were more taking on board the feedback in terms of what we wanted to change, making some improvements, and they seemed quite open to the ideas we presented to them.

“We also got the feeling that the whole approach was more thought-through and convincing than S&P, where the changes seem to have been driven by people not close to covered bonds.”

Fitch described in its release changes it had made to its proposals in light of industry feedback.

“Market participants generally expressed their support for a separate covered bond specific counterparty criteria report that takes into account the dual-recourse and dynamic nature of covered bond programmes,” it said. “Having reviewed the feedback, the agency has made various changes and clarifications to the final counterparty criteria compared to the exposure draft.”

When S&P in January announced that it was delaying its implementation to covered bonds of counterparty criteria for structured finance transactions, and would be reviewing the relevant criteria, it said that the new review would take into account “the dual recourse nature of covered bonds” as well as “the multiple number of counterparties that may provide support to the covered bonds”.

A market participant said that he expected revised proposals from S&P to emerge by next month.