Axa Bank Europe SCF has dropped S&P from rating its covered bonds because of the rating agency’s proposed counterparty criteria, an official at the issuer told The Covered Bond Report. Moody’s has been hired in its place to rate the obligations foncières, alongside Fitch.

Axa, Brussels

In a notice to noteholders Axa yesterday (Wednesday) said that it has requested Moody’s to rate the issuer’s series one and three notes and that S&P withdraw its ratings (AAA) of these issues. Moody’s yesterday assigned a definitive Aaa to these covered bonds and a provisional Aaa rating to a new, Eu1.5bn December 2021 floating rate issue (series four).

Lieven Goosens, who works in the long term funding department at Axa Bank Europe, told The Covered Bond Report that the issuer decided to drop S&P from rating its covered bonds programme and the Royal Street series used as collateral for the obligations foncières because of the rating agency’s proposed covered bond counterparty criteria.

“We at ABE recognise the benefits of counterparty diversification, but the potential number of external hedging counterparties that S&P would require is too high for a small covered bond programme like ours,” he said. “It is just not feasible for us given that we just started our programme last year in November.

“In addition to that, S&P’s swap liquidity requirements are very punishing, given the high volatility buffers needed to post when the swap counterparty is downgraded below the rating trigger, under the covered bond and RMBS swap.”

S&P in March released a Request for Comment on proposed changes to its covered bond criteria for assessing counterparty and supporting party risk, and The Covered Bond Report understands that resolution of the final covered bond counterparty criteria will occur in tandem with resolution of a proposed expansion – announced at the end of November – to its methodology and assumptions for assessing derivative obligations and specific amendments to other aspects of the criteria for counterparty risk.

Moody’s ratings of Axa’s covered bonds are based on an A2 rating of Axa Bank Europe as the sponsor bank, with stressed cover pool losses modelled in the event of an issuer default standing at 14.9%, entirely reflecting market risk.

Obligations foncières issued by Axa Bank Europe SCF are backed by residential mortgage backed securitisation notes issued by Royal Street NV/SA, which Moody’s has rated Aaa.

The collateral score for the cover pool is 0%, consistent with the Aaa rating of the RMBS notes. The rating agency has assigned a Timely Payment Indicator (TPI) of “probable” to the covered bonds.