The number of covered bond programmes on CreditWatch negative at Standard & Poor’s has dropped to its lowest proportion since the first quarter of 2011, but the rating agency said on Monday that upcoming changes to its methodology could lead to downgrades, in Spain in particular.

According to the rating agency, only 16% of the covered bond programmes it rates were on CreditWatch negative or carried a negative outlook in the second quarter of this year. This is down from 30% at the end of 2012, and the lowest since 2011.

Five programmes were on positive outlook in the same period, four of which were Spanish. The rating agency said the Spanish presence here reflects its view of improved creditworthiness of some lenders due to what S&P characterised as surprisingly robust Spanish economic growth.

The rating agency noted that asset-liability mismatch (ALMM) risk has decreased in some of the programmes it rates, adding that in the second quarter of this year it classified almost 90% in the “zero” or “low” risk ALMM categories.

“Issuers’ active management of ALMM risk partly explains this trend,” said S&P. “For example, nine programmes that we classified as having high or moderate ALMM risk in Q1 2013 are now in the ‘low’ risk category.”

As a result, close to 95% of the programmes it rates qualified for a maximum of six or more notches of uplift from the relevant issuer credit rating (ICR) under the rating agency’s ALMM criteria in the second quarter, compared with 87% for the same period last year.

The rating agency noted that this has resulted in covered bond ratings benefitting from more unused notches of uplift.

“In aggregate, this has increased their resilience to issuer downgrades, although this varies widely by country,” says the rating agency. “The proportion of programmes with no unused notches of uplift … has also declined marginally since early 2013, but remains high, at about 33%.”

According to S&P, the proportion of issuer ratings on CreditWatch negative, or with a negative outlook, fell to 45% in the second quarter, compared to 64% a year earlier.

However, S&P said that proposed changes to its methodology that are likely to become effective this year could result in downgrades in 2014.

“Despite the positive indicators, the risk remains that covered bond downgrades could outnumber upgrades in 2014,” said S&P. “In October 2013, we requested comments on proposed changes to our methodology for rating structured finance transactions above the sovereign.”

These changes relate to single jurisdiction structured finance transactions and include a proposed reduction in the maximum possible uplift above sovereign ratings that covered bonds can achieve from six to four notches.

S&P said that the changes could result in it downgrading 50%-60% of the Spanish covered bonds that it rates.

In addition, S&P in April published an advance notice of proposed changes to its rating methodology to reflect the EU Bank Recovery & Resolution Directive. It noted on Monday that it intends to publish a related request for comment in the near future. The rating agency said that it expects the revised criteria may lead to covered bond rating actions.