Fitch on Friday confirmed that structural changes have been made to covered bond programmes of four Greek banks that it had said were necessary to stave off downgrades. The rating agency welcomed contractual Asset Percentage commitments, but said it will keep an eye on levels of unencumbered assets.

The BBB- ratings of the four programmes remain on Rating Watch Negative. The rating agency said that its continuing review “reflects the adverse economic conditions and heightened uncertainty surrounding recent developments in Greece”, and the RWN status of the four banks’ issuer ratings.

Alpha Bank, Eurobank EFG, National Bank of Greece and Piraeus Bank completed structural adjustments to transform the liability profiles of covered bond programmes in line with a release by Fitch on 14 July, which had said that the changes were expected by 29 July and that the ratings would be cut were the restructurings not implemented by then. NBG’s changes are to its Programme II.

Fitch said structural amendments to the four covered bond programmes have changed their liability profile from soft bullet redemption to partial pass through amortisation. The rating agency said that this transformation mitigates refinancing risk after an issuer default by eliminating maturity mismatches between the cover assets and the covered bonds.

In a downgrade of the four programmes from BBB on 14 July, Fitch said in the event of an issuer default the old soft bullet redemptions would have meant that a certain portion of the mortgage cover pool would have needed to be liquidated after 10 years in order to repay the covered bonds still outstanding at that time.

Fitch lowered the Discontinuity Factor – which measures the chances of an interruption of a likelihood of payment, with 0% being the best and 100% being the worst – from 45% to 11.5%. This action was taken mainly due to the “improvement in the liquidity gaps assessment of the four programmes given that it would no longer be necessary to sell or refinance the cover assets to repay at their maturity date”.

Fitch also revised its initial assessment of the Discontinuity Factor components, including asset segregation, alternative management, and regulatory oversight.

A D-Factor of 11.5% translates to a maximum achievable rating of BBB- on a probability of default basis, said Fitch. The rating agency capped the final rating at BBB- on the covered bonds, notwithstanding any uplift from recoveries from the cover pool in a default of the bonds.

Fitch said that the maximum committed Asset Percentage from Alpha Bank is 87.6%, Eurobank EFG 84.9%, National Bank of Greece programme II 83.7%, and Piraeus 89.4%.

The issuers have revised their programmes so that the maximum Asset Percentage commitment is contractually undertaken. Fitch said a contractual Asset Percentage clause offers more protection to bondholders than a public commitment. The rating agency said it was a credit positive for the issuers’ covered bonds.

Fitch added that it expected Greek issuers to demonstrate an ability to replenish their cover pools on a regular basis by maintaining assets over and above the volume of assets required to meet their contractual Asset Percentage commitments. The availability of eligible and unencumbered assets at bank level will continue to be monitored by Fitch, despite no evident asset shortage issue. If availability were to fall at critically low levels, Fitch may decide not to give full credit to the committed Asset Percentage in its analysis.