Eleven programmes placed on positive outlook by Fitch after it rolled out revised criteria to reflect covered bonds’ favourable position under the Bank Recovery & Resolution Directive (BBRD) could be upgraded once the text is signed, which is expected soon, Fitch said yesterday (Monday) in a summary of implementation of its amended methodology.

Fitch announced new rating criteria in early March to take into account covered bonds’ exemption from bail-in under the BRRD, and began rolling these out in late March, assigning issuer default rating (IDR) uplifts to programmes where applicable to reflect the asset class’s position.

The rating agency also carried out outlook revisions as part of the implementation of the updated criteria. Eleven programmes were placed on positive outlook, 27 were kept on or revised to negative outlook, and 90 were kept on or revised to a stable outlook. One other programme is on Rating Watch Evolving and another on Rating Watch Negative.

Fitch said that it will review the rating of covered bond programmes on positive outlook over the coming weeks, once the text of the BRRD is signed by representatives of the European Parliament and the Council of the European Union, which it expects to happen in the middle of May, and that ratings could be upgraded if justified by overcollateralisation (OC) levels.

These would the first upgrades stemming from the rating agency’s methodological response to the introduction of bail-in frameworks in Europe.

The rating agency said that 92 of the 130 programmes publicly rated by Fitch were eligible for IDR uplift. Of these, 40 were assigned an IDR uplift of two, 29 a one notch uplift, and 23 were not assigned an uplift.

“While this last group were eligible for an IDR uplift due to their exemption from bail-in, they nevertheless did not fulfil the criteria for a positive uplift,” said Fitch.

The breakeven OC levels for existing rating levels could decrease for those programmes on stable outlook, added Fitch, if the combination of the issuer IDR and the IDR uplift leads to a covered bond rating on a probability of default basis that is within two notches of the prevailing covered bond rating for investment grade ratings. The threshold is three notches for speculative grade ratings.