Fitch has placed three German Pfandbriefe and one Danish covered bond programme on Rating Watch Negative (RWN) after it yesterday (Tuesday) began implementing its updated covered bond rating criteria, under which it has assigned Discontinuity Caps and outlooks to programmes from several jurisdictions.

The rating agency on Monday announced an update to its covered bond rating criteria, and yesterday announced the first outcome of their application, beginning with Danish and Norwegian programmes.

This included Fitch placing Realkredit Danmark’s capital centre T mortgage bond rating (AAA) on RWN because a Discontinuity Cap (D-Cap) of 2 (high risk) caps the maximum achievable rating for the programme at AA+.

The rating agency said that the driver of the D-Cap of 2 is the high risk assessment of the liquidity gap and systemic risk component of the D-Cap, in turn due to the liquidity risk posed by the refinancing of the adjustable rate mortgages (ARM) loans, which make up 100% of the capital centre T.

“Realkredit’s significant mortgage covered bonds refinancing needs could prove challenging if it entered into insolvency,” said Fitch, “even if the Danish law allows for an administrator to issue refinancing bonds.”

At the time of writing Fitch had also applied the updated rating criteria to German, Norwegian, and Spanish programmes, with three Pfandbriefe programmes the only other covered bonds to have been placed on RWN: Deutsche Pfandbriefbank (pbb) mortgage Pfandbriefe (AA+), Düsseldorfer Hypothekenbank public sector Pfandbriefe (AA-), and Wüstenrot Pfandbriefbank mortgage Pfandbriefe (AAA).

The RWN placements reflect a D-Cap of 2 (high risk) in the case of pbb’s mortgage Pfandbriefe and a D-Cap of 4 (moderate risk) for Wüstenrot’s programme, which cap the maximum achievable covered bond ratings at levels lower than the prevailing ratings.

Düsseldorfer Hyp’s programme has been assigned a D-Cap of 4 (moderate risk), which caps the Pfandbriefe rating on a probability of default (PD) basis at A. The Pfandbriefe could still achieve a AA- rating, according to Fitch, but the level of publicly committed OC that the rating agency relies upon does not support a two notch recovery uplift. Before the criteria were updated Fitch said the rating on a PD basis was A+ and the level of OC that Fitch relied upon was sufficient to support a one notch recovery uplift.

The rating agency said that issuers whose programmes were placed on RWN are expected to provide feedback within one month regarding any plans to change their programmes. If no changes are proposed, Fitch expects to downgrade ratings.

“If changes likely to impact the ratings are proposed, Fitch will review any implementation plans to determine how the RWN could be resolved,” it said. “Provided changes addressing the drivers of a potential downgrade are implemented within a reasonable timeframe, the ratings will remain unchanged.”

Fitch applied its revised criteria to seven Spanish programmes, assigning negative outlooks to three, with four other cédulas programmes already on RWN and therefore not assigned outlooks. D-Caps of 0, reflecting “full discontinuity risk”, were assigned to three programmes and a D-Cap of 1, for “very high risk”, assigned to the remaining programmes.

Four Norwegian programmes were assigned D-Caps, three D-Caps of 4 for “moderate risk” and one D-Cap of 2 for “high risk”. Fitch separately affirmed covered bonds issued by Norway’s KLP Kommunekreditt at AAA, on stable outlook, based in part on a D-Cap of 4.

The rating agency applied its new criteria to four further Danish covered bond programmes besides Realkredit Danmark’s Capital Centre T issuance. The mortgage credit institution’s Capital Centre S was assigned a D-Cap of 3 (moderate high risk), and a stable outlook, while three Danske programmes were also assigned a D-Cap of 3, on negative outlook.

In Germany Fitch assigned D-Caps to all non-guaranteed Pfandbriefe. It assigned a negative outlook to the AAA rating of public sector Pfandbriefe issued by Wuestenrot Pfandbriefbank and stable outlooks to all other German programmes.

It assigned nine D-Caps each of 4 (moderate risk) and 5 (low risk), one D-Cap of 3 (moderate high risk), one D-Cap of 2 (high risk), and one D-Cap of 0 (full discontinuity risk).