Fitch has revised the Discontinuity Cap on BNP Paribas Public Sector SCF obligations foncières from Moderate Risk (D-Cap of 4) to High Risk (2) because of a shortened pre-maturity test period, although the rating agency affirmed the covered bonds’ rating at AA+.

The rating agency changed its scoring of the liquidity gap and systemic risk component of the D-Cap, from Moderate to High, because the pre-maturity test period was shortened from 12 months to six months.

The Covered Bond Report understands that this change dates back to early 2013 and was made in connection with Standard & Poor’s criteria, with the revision of the D-Cap by Fitch seen as a surprisingly harsh assessment of the change.

The 12 month pre-maturity test committed BNP Paribas to including liquid assets covering the bonds maturing in the following 12 months following a downgrade of BNP Paribas to below F1+, but the commitment has been changed to cover a period of six months.

“This would increase the discontinuity risk following a default of BNP Paribas, as it shortens the time available to bridge liquidity gaps to six months from 12 months,” said Fitch yesterday (Monday). “This could be challenging, given the limited liquidity of export credit agencies (ECA) loans and the small number of potential buyers for the ECA guaranteed loans.”

BNP Paribas SCF obligations foncières are secured mainly by government-guaranteed ECA loans. France and the UK are the lowest rated sovereigns represented in the cover pool, and the default risk of the collateral is directly linked to that of these sovereigns under a weakest link approach applied by Fitch in an exception to its global rating criteria for single- and multi-name credit-linked notes.

The outlook on the obligations foncières is stable, in line with that of the French and UK sovereigns.

The Covered Bond Report understands that the issuer could take steps to mitigate Fitch’s concerns with respect to the liquidity gaps, such as extend the pre-maturity test period to nine months, but that the covered bonds ratings’ link to the rating of the lowest rated sovereigns in the cover pool means this would not have an impact on the overall rating.

Fitch said that obligations foncières could be cut to below AA+ rating if, all else being equal, one of the following occurred: BNP Paribas Issuer Default Rating was downgraded to A- (from A+); the D-Cap fell to 0 (full discontinuity); the OC level decreased below 5.2%, which is the minimum OC in line with the AA+ covered bonds rating; the cash held with BNPP was considered as excessive, which could occur if this amount was more than what is due on the bonds over the next 12 months, as per Fitch’s counterparty criteria; or if one of the sovereign exposures in the cover pool was downgraded below AA+.