Fitch downgrades of Italy and Spain prompted the rating agency to put the triple-A ratings of four German public sector covered bond programmes on Rating Watch Negative today (Wednesday). The rating agency expects to present an exposure draft on a revised approach to public sector cover pools in early 2012.

Fitch placed on negative review the public sector programmes of Aareal Bank, Deutsche Pfandbriefbank, Düsseldorfer Hypothekenbank and Eurohypo. The rating agency also maintained on negative review the public sector covered bonds of Ireland’s Depfa ACS Bank.

Fitch on Friday downgraded Italy to A+, on negative outlook, and Spain to AA-, on negative outlook.

“The rating actions reflect Fitch’s opinion that the deterioration of the sovereign ratings has lead to a heightened credit risk for public sector pools showing high exposure to debtors where the sovereign is rated lower than the covered bonds rating,” said the rating agency.

Fitch said that the programmes it placed on review had such exposure and increased loss expectations, and overcollateralisation levels insufficient to mitigate the heightened credit risk.

“Fitch will review the OC supporting the ratings of the affected programmes and communicate this to their issuers,” it said. “The RWN will be resolved depending on the updated OC supporting the current rating compared to the level of OC supplied to privileged creditors.”

The rating agency said yesterday (Tuesday) that it is revising its approach to credit risk in European public sector cover pools and expects to present an exposure draft for comment in the first quarter of 2012. It also expects to communicate updated stressed sovereign spread assumptions by year-end.

In the meantime, Fitch clarified its approach to country concentration in public sector covered bonds, saying that this was in response to enquiries received in the context of deteriorating European sovereign credit profiles.

“For cover pools consisting predominantly of exposures relating to a single country, the sovereign’s Issuer Default Rating (IDR) acts as a cap for the rating of the covered bonds on a probability of default basis,” it said. “The actual covered bond rating may incorporate up to a further two (or at non-investment grade, three) notches for recovery given default. However, in the case of internationally diversified cover pools, if the aggregate exposure against local, regional or central governments from countries rated lower than the covered bonds rating exceeds 10% of the cover pool, the agency will simulate the effect of an assumed sovereign default in the largest represented country.

“Different stress scenarios may be applied depending upon the specifics of the cover pool profile. Where this is the case, further information will be supplied by the agency in its rating communications for the specific covered bond programme concerned.”