The Covered Bond Report

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Fitch Co-Op covered cut matches issuer, now evolving

Fitch cut covered bonds issued by The Co-Operative Bank from AA- to A- on Friday, and left them on Rating Watch Evolving, after having downgraded the UK bank from BBB- to BB- a day earlier.

The three notch cut to the covered bonds’ rating reflects that of the issuer, as does the new evolving status. Fitch said its downgrade of Co-Op mainly reflects its concerns that the bank’s capital requirements are higher than originally anticipated.

The A- covered bond rating is based on Co-Op’s BB- rating, a Discontinuity Cap (D-Cap) of 4 (moderate risk), and an asset percentage (AP) of 77.5%. The AP of 77.5% allows for a rating of BBB on a probability of default basis and A- considering recoveries given default, as it is lower than the breakeven AP for that rating level, which is 90%, said Fitch.

The rating agency said that any rating action on Co-Op is likely to translate into a rating action of the same magnitude for the covered bonds, all else being equal.

Fitch noted that according to Co-Op’s programme documentation, the issuer has to use reasonable endeavours to enter, within 60 days, into a back-up servicing agreement with a third party as appropriate, because of the downgrade of the issuer below BBB-.

“Also, a suitable back-up cash manager should be appointed within 60 days, on a best effort basis,” it said. “Fitch will closely monitor any remedial action put in place by the issuer and review the rating accordingly.”