Fitch has completed its assessment of the D-Cap components for Polish covered bond programmes following an analysis of the country’s legislation, it said today (Tuesday), assessing as “moderate” the risks related to asset segregation and systemic alternative management.

Pekao Bank, Warsaw

After analysing the Polish covered bond legal framework Fitch finalised its assessment of the mortgage covered bond programme of Pekao Bank Hipoteczny, and the mortgage and public sector covered bond programmes of BRE Bank Hypoteczny, which are rated A with a Discontinuity Cap (D-Cap) of 0, indicating Fitch’s assessment of full discontinuity of payments after an issuer default.

Fitch today said that it assigned a “moderate” risk assessment to the asset segregation component of the D-Cap for the three covered bond programmes. The rating agency said that it considers low the overall risk related to the ring-fencing of the cover pool, but that the programmes “could be exposed to commingling risk prior to insolvency of the issuer and to set-off risk”.

“In addition, the absence of a clear cross-default clause among different series of covered bonds could prevent the pro rata allocation of proceeds from the cover pool among all outstanding series and introduce a risk of time subordination for the longest dated series,” said Fitch.

Fitch also assessed as “moderate” the systemic alternative management risk component of the D-Cap. This is due to the absence in the covered bond law of a specific reference to the appointment of an independent administrator that would act solely in the interest of covered bondholders in case of an issuer default, said Fitch. However, the rating agency noted as a positive the role of a curator representing covered bondholders’ right in bankruptcy proceedings.

The “moderate” assessment of the systemic alternative management D-Cap component also reflects that the Polish covered bond regulation does not specify how timely payments will be made after an issuer default, said the rating agency,

The rating action completed Fitch’s assessment of Polish covered bonds after the introduction of its updated covered bond criteria in September. Then, Fitch assigned Polish covered bond programmes D-Caps of 0, for full discontinuity, albeit without assigning risk assessments to the individual D-Cap components because of a lack of detailed information.

The risk associated with the privileged derivatives component of the D-Cap is “very low”, while Fitch has assigned a score of “full discontinuity” for the liquidity gap and systemic risk component because of the absence of any mandatory liquidity provision in Polish covered bonds legislation.

The D-Cap of 0 is driven by the risk assessment of this component, said Fitch.

“Combined with the insufficient marketability of the underlying assets the agency considers this risk as the weakest link for the programmes,” it said.