Fitch affirmed covered bonds issued by Northern Rock Asset Management at AAA today (Thursday), although – unlike in a recent Bradford & Bingley affirmation – it gave no credit to an HM Treasury guarantee because of differences between the two support arrangements. Greater overcollateralisation was required to maintain the rating.

Fitch said that it does not give credit to the guarantee provided to NRAM’s covered bonds because it can be removed with at least three months’ notice.

“If this were to occur, there is no requirement in the programme to increase OC or enhance credit support to a level that would support a AAA rating,” said the rating agency. “As a result, the agency is not comfortable giving credit to a short term guarantee to support its long term rating on the covered bonds as it does not consider there is sufficient protection to support the covered bond rating upon withdrawal of the guarantee.”

Last month Fitch affirmed at AAA covered bonds issued by Bradford & Bingley based on an HM Treasury guarantee, even though the rating agency said that in that case it made an exception to its standard criteria for analysing such support, which focus on their irrevocability. Fitch said that the B&B 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.

The rating agency said that the AAA rating of NRAM’s covered bonds is based on the issuer’s A+ rating and a revised discontinuity factor of 34.7%.

“This combination enables the covered bonds to reach AA on a probability of default (PD) basis, compared to AA+ previously,” said Fitch. “However, the programme can still be rated up to AAA when factoring in recoveries given default, subject to the overcollateralisation (OC) being sufficient for these levels of stresses.

“The asset percentage (AP) supporting a AA rating on a probability of default basis and a AAA rating factoring in recoveries now stands at 61.9% versus 68.4% previously… The change in the supporting AP is driven by Fitch updating its credit analysis on the cover pool and the recent update of the refinancing spread assumptions for the UK.”

Moody’s noted that the D-Factor had risen because of Fitch’s new covered bond counterparty criteria.

It also said that the D-Factor analysis does not give any credit to regulatory oversight as – like B&B’s – the programme is not registered under the UK Regulated Covered Bond framework.