Fitch put on Rating Watch Negative the AAA ratings of public sector covered bonds issued by Barclays Bank and BNP Paribas Public Sector SCF, and of mortgage covered bonds issued by Bradford & Bingley yesterday (Tuesday), following the placement of the UK on negative review last week.

Barclays’ public sector covered bonds are exposed to the UK sovereign as their cover pool contains loans to UK local authorities. Fitch said that their current level of overcollateralisation would not protect investors from the impact that a sovereign default would have on the creditworthiness of UK local authorities, and therefore any downgrade of the sovereign would result in a downgrade of the covered bonds, all else being equal.

BNP Paribas Public Sector SCF’s covered bonds are backed by government-guaranteed assets, with 12.8% of the cover pool backed by the UK government, according to Fitch. The rating agency said that the programme’s current level of overcollateralisation would not support the covered bond triple-A rating if the UK sovereign was downgraded.

Bradford & Bingley’s mortgage covered bond ratings are also exposed to the UK sovereign as they are based on a guarantee from HM Treasury, which will expire when the bank is completely wound down.

“As a result, a downgrade of the UK sovereign would have a direct impact on the creditworthiness of B&B’s covered bonds,” said the rating agency.

Fitch noted that covered bonds issued by Northern Rock Asset Management are not affected by the Rating Watch Negative of the UK sovereign because Fitch only relies on the overcollateralisation that the issuer commits to because the government guarantee that backs the bond can be removed with a three month notice.

However, the rating agency said that Northern Rock’s programme could be downgraded in case of a downgrade of the UK sovereign that impacted the management strategy of the covered bond programme.

The reviews are expected to be resolved together with the review of the UK sovereign rating by the end of April.