S&P has raised the ratings on Bradford & Bingley’s mortgage covered bonds from AA to AAA, without giving any credit to a guarantee of the covered bonds by HM Treasury, while an affirmation of the covered bonds at AAA by Fitch on Friday was based on the guarantee.

Based on a programme categorisation of “2” and an asset liability mismatch risk of “low” S&P yesterday (Wednesday) said that it concluded that the maximum potential ratings uplift for Bradford & Bingley’s covered bond programme is six notches above the undisclosed long term rating of the issuer.

“Based on this application of our criteria for assessing ALMM risk in covered bonds and our cashflow assumptions, which address market value risk,” said S&P, “we believe that the current available credit enhancement in the programme is commensurate with a AAA rating.”

The ALMM classification was previously “moderate” but was reduced to “low” following an increase in available credit enhancement to the cover pool, “as well as the maturities of series 2 and 10 and early redemption of series 19”.

S&P expects the ALMM in the programme to remain “low” over the course of the next year.

However, S&P revised the outlook on the UK programme from stable to negative.

“The negative outlook reflects our view that the asset percentage commensurate with the AAA rating is not reflected in the issuer’s investor report,” said the rating agency. “We believe that the current asset percentage in the investor report is commensurate with a AA- rating on the covered bonds.”

If excess collateral in the cover pool were to be removed to a level commensurate with the current asset percentage a AAA rating would not be achievable, it added, although all else being equal the covered bond rating would not fall by more than one rating category.

S&P’s rating of Bradford & Bingley’s programme does not give credit for a government guarantee of its covered bonds “because we have not received comfort that the guarantee arrangements meet our sovereign guaranteed debt criteria for rating substitution”.

Irrevocability not guaranteed but commitment serious

Fitch’s rating of Bradford & Bingley’s covered bonds continue to be based on the guarantee from HM Treasury, with the rating agency saying that it made an exception to its standard criteria for analysing guarantees, which focus on their irrevocability.

The rating agency on 22 July affirmed the covered bonds at AAA, saying that neither the Discontinuity Factor nor the level of asset percentage are drivers of the covered bond rating given the existence of the guarantee.

Fitch noted that HMT’s original guarantee statement did not specify whether its guarantee is for timely payment of obligations or for payment of obligations when creditors suffer a loss, and that the rating agency interprets the guarantee terms as not prescribing timely payment of obligations.

“The agency relies on the ‘AAA’ protection for investors to be based on recoveries after a covered bond default,” said Fitch, flagging potential for cross-default of B&B’s senior unsecured debt maturing in 2047 if a covered bond payment is missed before 2031, when they mature.

“A missed payment on the covered bonds may lead to an acceleration of all covered bonds, which would require a larger and earlier payout under the guarantee than repaying the covered bonds as they become due,” it said.

Fitch said that the guarantee does not contain language describing it as “irrevocable” but that it made an exception to its standard criteria for analysing guarantees because it considers that governments do not make such guarantee commitments lightly. Their credibility and potentially that of the UK financial markets could be at risk if the government went back on its promise, it said.