Fitch has amended public sector spread assumptions used in its covered bond analysis, reallocating countries to spread level categories and increasing spread levels for all but one of these, with a jump in stressed spreads for Italy and Spain representing the greatest change.

The updated stresses will be applied by Fitch in its analysis of European public sector covered bond programmes over the next six months, although the rating agency does not expect the changes to trigger rating changes. The level of overcollateralisation deemed necessary to support a given rating could increase, however, depending on the composition of cover pools and the extent of maturity mismatches.

Sovereign spread assumptions are used by Fitch to calculate expected sale proceeds on the sovereign debt portion of a covered bond programme post-issuer default in the event that there is a maturity mismatch and the cashflow from cover pool assets cannot be relied upon to make payments to covered bondholders.

Fitch applies these stressed assumptions in addition to stressed interest rates to derive the stressed net present value of future cashflows.

The Covered Bond Report understands that the rating spread levels (RSLs) for all country categories save category A were increased and that some countries were reallocated to different spread level categories – this makes it difficult to directly compare the previous and new assumptions.

For example, the UK and the Netherlands were moved from group B, where they sat under the previous assumptions, to group A, thereby benefitting from lower spreads. The spread levels that Fitch applies in a triple-A stressed rating scenario for debt exposed to public sector debt stemming from countries in this group is 60bp, compared with 80bp for group B under the old assumptions.

Denmark, which Fitch has included in its latest assumptions to reflect changes in the composition of cover pools, has been allocated to group A, while the rating agency removed Korea and Japan from the categorisation (previously in category D), also to reflect the composition of cover pools securing programmes Fitch rates.

France remains part of group B, although this category is subject to a higher triple-A spread level assumption of 120bp following the changes made by Fitch. Austria was moved to group B from group C, but is subject to the same triple-A RSL of 120bp as before.

Stressed spread levels were increased the most for Italy and Spain. The countries used to be allocated to group E, with a triple-A RSL of 250bp, and have been moved to group D, to which Fitch applies a triple-A RSL of 600bp.

Spread Level Categories

Source: Fitch, a) RSLs for group F are applicable only for internationally diversified programmes