Fitch expects no direct impact from new counterparty proposals

Fitch has opened a one month consultation on proposed changes to its structured finance and covered bonds counterparty criteria, with amendments to minimum rating eligibility thresholds and an extension of eligible collateral among them.

The rating agency does not expect the revised criteria, if applied as proposed, to have any direct impact on existing ratings, and also said that it does not expect documentation changes to be made to existing programmes to reflect the revised criteria once they are finalised.

Fitch yesterday (Tuesday) published an exposure draft setting out proposed changes to its covered bond counterparty criteria, a day after doing the same for its counterparty criteria for structured finance transactions. The consultation period for the covered bond criteria ends on 14 April, with Fitch aiming to publish final revised criteria in May.

Fitch said that it is proposing that thresholds for structured finance counterparty exposure are additionally adopted for covered bond programmes, and that it expects to maintain its core criteria whereby, without collateral, counterparties are expected to have a minimum long term issuer default rating of A and a minimum short term IDR of F1, to support AAA- covered bonds.

Florian Eichert, senior covered bond analyst at Crédit Agricole, drew attention to eligibility thresholds and eligibility of different types of collateral as the main points emerging from the rating agency’s proposals for revised structured finance transactions, which also affect covered bonds.

Fitch is proposing to establish additional rating eligibility thresholds to support note ratings below AAAsf (the “sf” denoting structured finance transactions), and Eichert noted that the rating agency is lowering by one notch the minimum counterparty rating thresholds for transactions rated AA+ to AA- for eligible counterparties that do not post collateral, and that it will also ignore any Rating Watch Negative (RWN) status, only focussing on the prevailing rating.

For counterparties posting collateral, the main change, he added, is for transactions rated Asf, for which the proposed new eligible counterparty rating threshold is BB+ rather than BBB-.

The rating agency said that, if adopted, the proposed extended eligibility thresholds could in certain circumstances lead to higher maximum ratings for some transactions.

Fitch is also considering extending the range of eligible collateral types beyond cash and highly rated sovereign bonds to include structured finance bonds, covered bonds, and corporate bonds.

“In view of the current counterparty environment and the negative rating migration of a number of sovereigns” said Fitch, “the extent of eligible collateral available to post for counterparties that have breached thresholds has reduced.”

Structured finance, covered bonds and/or corporate bonds could provide suitable collateral subject to appropriate eligibility criteria and advance rates that reflect the credit and market value risks, said Fitch.

In addition to the above, the rating agency is, in direct reference to its covered bonds counterparty criteria, proposing to clarify its treatment of netted collateral positions, and increase the link between an issuer rating and the covered bond rating on a probability of default basis if potential liquidity stress posed by pari passu or senior ranking termination payments is not mitigated.

“Fitch proposes to no longer adjust upwards the overcollateralisation supporting a given covered bond rating, as the credit risk is already reflected in its cashflow analysis,” it added.