Fitch announced final covered bond sovereign risk criteria on Friday after a one month consultation, with only a limited number of multi-jurisdictional programmes expected to potentially be cut. Analysts identified German Pfandbriefe and Irish and French public sector programmes as candidates.

Fitch announced the final criteria on Friday, setting out how structured finance and covered bond ratings are constrained by the credit quality of the sovereign to which the transactions or programmes are exposed. The rating agency also outlined its approach to assigning ratings that are higher than the relevant sovereign’s local currency issuer default rating (IDR) and ratings to multi-jurisdictional programmes.

A covered bond analyst noted that Fitch capped ratings in countries such as Spain, but that it did so by limiting the probability of default (PD) rating of the covered bonds at the level of the issuer rather than having an explicit sovereign ceiling in place.

The final criteria are consistent with the methodology Fitch presented in an exposure draft on 22 January, which in turn largely reflected the rating agency’s analytical practices. As such, Fitch in late January said that the criteria were not expected to affect covered bond ratings where the cover pool assets are concentrated in a single jurisdiction, an outlook that it confirmed on Friday. (See here for previous coverage.)

Also in line with the impact it flagged in January, Fitch on Friday said that “a limited number of ratings assigned to multi-jurisdictional structured finance notes and covered bond programmes may be downgraded by one or two notches”.

“Where structured finance or covered bond portfolios include assets from different jurisdictions, it is not possible to peg the maximum structured finance or covered bond rating achievable to a unique sovereign local currency IDR or country ceiling,” said Fitch.

A covered bond analyst said that mainly German Pfandbriefe would come into question here, and suggested that, as such, any rating impact would not be too consequential, for example with respect to rating thresholds for LCR eligibility.

Other analysts also identified as French and Irish public sector programmes, such as those of BNP Paribas Public Sector SCF, Caisse Française de Financement Local, and Depfa ACS Bank, as featuring collateral from multiple jurisdictions.

“The only area where we can see the potential for some downgrades is in covered bond programmes backed by international pools where some pool assets come from low rated countries while the covered bonds are still highly rated,” said one. “It is hard to determine the individual programmes and the extent of the individual downgrades though as so much is left to the discretion of Fitch.”

In analysing multi-jurisdictional covered bond programmes Fitch takes into account transfer and convertibility (T&C) risk, which it said can become a secondary rating driver given their diversified country risk exposure.

“For this reason, Fitch applies a specific and less stringent approach where the exposure to sovereigns with a lower country ceiling than the structured finance or covered bond rating is below 20%,” it said. “As in the case of single jurisdiction structured finance transactions or covered bonds, exposure to macroeconomic and/or event risks is analysed separately and may lead to rating caps if material, regardless of the T&C risk assessment.”