Fitch has finalised updated criteria for its asset analysis approach to rating covered bonds backed by assets exposed to public entities, and yesterday (Wednesday) said it expects fewer programmes to be affected than the seven it had named when it published an exposure draft.

The downward revision of its expectations about the number of programmes likely to be affected is mainly due to improvements in the composition of some of the cover pools, said Fitch.

When the rating agency published an exposure draft on the proposed new criteria – in October – it had identified seven programmes it expected to be affected by the update, assuming overcollateralistion levels stayed the same:

• Aareal Bank public sector Pfandbriefe, AAA/stable;

• Barclays Bank public sector covered bonds, AAA/negative;

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

• Dexia MA obligations foncières, AAA/Rating Watch Negative;

• Hypothekenbank Frankfurt International (Eurohypo) public sector lettres de gage, A+/stable;

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

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

Fitch said yesterday that it will communicate to the seven issuers updated breakeven OC levels that follow from the criteria update, and that it anticipates an increase in breakeven OC levels ranging from 0%-4%.

“The agency expects feedback from issuers within two weeks regarding any plans to increase the programmes’ OC levels,” said Fitch. “If no changes are proposed, ratings may be downgraded after this period.”

It will apply its new criteria to 16 further covered bond programmes within the next six months.

The criteria in question are used for Fitch’s analysis of asset-related risks in covered bonds and collateralised debt obligations (CDOs) backed by assets exposed to European central, local and regional governments, and public sector entities, which Fitch collectively refers to as public entities.

The rating agency launched a consultation on proposed new criteria in October, and yesterday said that it received feedback from an industry association and various covered bond issuers during the consultation period.

“The agency reviewed and carefully considered the feedback which mainly led to additional clarifications in the published criteria report,” it said.

According to Fitch, the main proposals from the exposure draft that have been incorporated into the final criteria relate to the modelling of material contagion risk among euro-zone members, and recovery assumptions for European sovereigns and subnationals.

As regards recovery assumptions for European sovereigns, Fitch said that the proposal approach will involve lower recovery rate assumptions than previously applied for most European sovereigns.