Fitch is proposing changes to its criteria for rating covered bonds and CDOs backed by assets exposed to public sector entities and is also planning to update assumptions for the asset marketability of public sector assets, with seven covered bond programmes’ ratings set to be affected if the criteria changes are implemented as proposed and OC levels do not increase.

The rating agency yesterday (Wednesday) launched a consultation on the proposed changes and an extended account of existing criteria, with feedback invited until 20 November. Fitch expects to publish final revised criteria in December.

The main proposals the rating agency is consulting on are: the modelling of material contagion risk among euro-zone members; revised recovery assumptions for most European sovereigns and for European sub-nationals; and revised assumptions for the stressed time to liquidate assets.

The latter has a bearing on the rating agency’s Discontinuity analysis for covered bonds, as part of which Fitch is proposing to update its assumptions for asset marketability of public sector assets, as measured by the time needed in a stressed environment to liquidate the assets.

“The proposed approach references the country of the debtor and continues to differentiate the assumed asset liquidity based on instrument type and debtor type,” said Fitch.

The rating impact of Fitch’s proposals depends on programme types, it said, with public sector programmes or transactions exposed to euro-zone countries that are rated lower than the respective covered bonds among those programmes whose ratings will be most affected.

“However, the degree of expected impact varies strongly depending on the characteristics of each programme,” said Fitch.

It said that according to a preliminary analysis, the ratings of seven covered bond programmes would be affected if the criteria changes were implemented as proposed and overcollateralisation levels remain at current levels. In these cases, Fitch expects that downgrades would generally range from one to three notches. The programmes in question and their ratings are:

• Aareal Bank public sector Pfandbriefe, AAA/stable

• Barclays Bank public sector covered bonds, AAA/stable

• Depfa ACS Bank public sector asset covered securities, A/negative

• Dexia MA obligations foncières, AAA/Rating Watch Negative (RWN)

• Hypothekenbank Frankfurt International (Eurohypo) public sector lettres de gage, AAA/ RWN

• KLP Kommunekreditt AS public sector covered bonds, AAA/stable

• NordLB Covered Finance Bank public sector lettres de gage, AAA/stable

Fitch said that covered bond programmes’ ratings are unlikely to be affected by the proposed changes if certain characteristics are in evidence, such as there being sufficient cushion in available enhancement to compensate an expected increase in credit loss, or the covered bonds being only rated one notch above the Issuer Default Rating (IDR), based on above average stressed recoveries given default.

“In these cases, the agency expects that the current ratings could be maintained albeit in some cases on the basis of higher breakeven enhancement levels,” said Fitch.

It identified 15 covered bond programmes that, based on a preliminary review, it does not believe would be affected by the proposed changes (see below).

“To the extent the breakeven enhancement for the rating would increase should the criteria changes be implemented as proposed,” said Fitch, “the agency’s preliminary tests indicate that sufficient protection is already in place to withstand the increased stresses.”

Covered bond programmes not expected to be affected

Bayerische Landesbank public sector Pfandbriefe, AAA/Stable

Berlin-Hannoversche Hypothekenbank AG public sector Pfandbriefe, AA- /Stable

BNP Paribas Public Sector SCF obligations foncieres, AAA/Negative

BRE Bank Hipoteczny public sector covered bonds, A/Stable

Caixa Geral de Depositos S.A. obrigacoes sobre o sector publico, BBB-/Negative

Cassa Depositi e Prestiti public sector covered bonds, AA+/Stable

Deutsche Postbank AG public sector Pfandbriefe, AAA/Stable

HSH Nordbank AG public sector guaranteed Pfandbriefe, AAA/Stable

Landesbank Baden-Württemberg public sector Pfandbriefe, AAA/Stable

Landesbank Berlin AG public sector Pfandbriefe, AAA/Stable

Landesbank Hessen-Thüringen Girozentrale public sector Pfandbriefe, AAA/Stable,

Norddeutsche Landesbank Girozentrale public sector Pfandbriefe, AAA/Stable,

NRW.BANK public sector Pfandbriefe, AAA/Stable,

UniCredit Bank AG public sector Pfandbriefe, rated AAA/Stable

Wüstenrot Bank AG Pfandbriefbank public sector Pfandbriefe, rated AAA/Negative