DBRS has updated its European covered bond rating methodology by revising market spreads for cover asset liquidation values and introducing the possibility of a one notch uplift being granted in cases where it cannot use its standard matrix or its application would otherwise lead to the same rating as the issuer.

The rating agency said that it will review the European covered bonds it rates and publish any rating actions as soon as possible. In Europe DBRS rates seven Portuguese covered bond programmes and issuance from Bank of Ireland Mortgage Bank.

Vito Natale, senior vice president, EU covered bonds, at DBRS, told The Covered Bond Report that no fundamental changes were made to the rating agency’s methodology, but that DBRS has revised its approach to cases where it could not apply its legal and structuring framework (LSF) matrices or their application would result in a covered bond being rated in line with the issuer.

“In the past where for whatever reason it was not possible to apply the LSF matrix we would default to the issuer rating,” said Natale. “Now we are saying that where we find that there is sufficient value in the cover pool we may grant one notch uplift from the issuer rating.

“It is to recognise that in most cases covered bondholders are in a better position than investors in senior unsecured debt.”

The LSF matrices set out the way in which the three building blocks of DBRS’s analysis – issuer rating, an assessment of the legal and structuring framework, and a cover pool credit assessment – interact to produce a final covered bond rating.

The adjustment of this aspect of DBRS’s methodology could have an impact on Banco Popular Portugal’s covered bond programme, which DBRS rates BBB, in line with the issuer rating. When DBRS assigned the rating at the end of August, it said that the lack of uplift from the issuer rating was due to a lack of data to analyse the commercial and residential mortgage loans in the cover pool, as a result of which the rating agency did not analyse the credit quality of the cover pool and assign a cover pool credit assessment.

Regarding market spreads for liquidation values of cover pool assets, Natale said that the rating agency moved Portugal and Italy to lower categories, associated with higher stressed spreads, and that the spread widening stress for tier three, the lowest category, was increased.

The market value spreads are based on weekly market spreads for senior RMBS securities from Ireland, Italy, the Netherlands, Portugal, Spain and the UK covering May 2008-November 2012. The data is used as a proxy for spread widening on the cover pool, although Natale said that other inputs can be used in the event that such RMBS data is not available.

“There are ways to work around it,” he said.