Proposed changes to Polish covered bond legislation will have no negative impact on the ratings of Polish issuance, according to Fitch, and could increase the maximum uplift over issuer ratings by the introduction of maturity extension provisions – even if this would not necessarily reflect improved repayment expectations.

Fitch said today (Thursday) that it expects that if the amendments are implemented the current hard bullet redemption of Polish covered bonds would be subject to a one year extension period should an issuer be unable to repay the bonds on the expected maturity date and could ultimately be transformed into a long term-pass through amortisation. The final maturity would be defined by law as being three years after the maturity of the longest asset included in the cover pool when the switch to pass-through is triggered, according to Fitch’s understanding.

The amendments will apply to outstanding and new issuance, said the rating agency, although it added that it will not view the planned modification as a default or distressed debt exchange despite the maturity extension being imposed on existing bonds.

“This is because the new provisions are not aimed at preventing an imminent default of any covered bond issuer,” said Fitch.

The amendments could result in higher Discontinuity Cap (D-Cap) assessments from Fitch for Polish programmes because the principal extension provisions and a mandatory liquidity reserve would introduce protection against liquidity gaps, it said, noting that this is currently lacking and explains why Polish programmes have D-Caps of zero (full discontinuity).

“A higher D-Cap assessment after the changes could increase the maximum achievable rating above the Issuer Default Rating,” it added, “but this will not necessarily be indicative of improved repayment expectations for existing covered bondholders. The ratings will address the expectation of repayment of the covered bonds according to their new extended amended term, rather than according to their original term.”

Fitch rates Polish covered bonds issued by mBank Hipoteczny at A, stable outlook, and those of Pekao Bank Hipoteczny at A-, stable.