Standard & Poor’s placed eight euro-zone covered bond programmes on CreditWatch negative yesterday (Thursday) because they will face lower caps on their ratings if sovereigns that they are exposed to, and which are on negative review, are downgraded.

Three covered bond programmes in France, three in Portugal, one in Italy, and one in Spain have been placed on CreditWatch negative. They include mortgage and public sector programmes.

The review of the respective sovereign ratings may lead S&P to lower some of the covered bond ratings by up to two notches, said the rating agency. The covered bonds affected are exposed to a portfolio where most of the assets are located in one or more of the four countries.

“We consider that due to country risk exposure, a link exists between the sovereign rating and the rating on a covered bond programme,” said S&P.

Programmes with “low” exposure to a country can be rated up to six notches higher than the relevant investment grade sovereign rating (with a limit of five notches for speculative grade-rated country exposure), but programmes with “high” exposure can only achieve a rating one notch above the sovereign. These caps override limits resulting from S&P’s asset-liability mismatch risk (ALMM) methodology.

The rating agency has placed on CreditWatch negative the ratings on all covered bond programmes where the covered bond rating is above the maximum rating that would be possible if S&P were to downgrade sovereigns to the maximum extent possible under the reviews it initiated on 5 December. If France, for example, were lowered by two notches, the maximum covered bond ratings would be capped at “AA+” if covered bonds were exposed to “high” French country risk.

The following covered bonds were affected: Crédit Mutuel Arkéa obligations foncières, rated AAA; Dexia Municipal Agency obligations foncières, AAA; Société Générale obligations foncières, AAA; Banco BPI public sector covered bonds, BBB; Banco BPI mortgage covered bonds, A+; Banco Santander Totta mortgage covered bonds, A; Banco Bilbao Vizcaya Argentaria cédulas territoriales, AA; and UniCredit SpA obbligazioni bancarie garantite, AAA.