Fitch could lower the ratings of 17 covered bond programmes in 2015 if, as it expects, the issuing banks’ Issuer Default Ratings are downgraded due to a weakening of government support under bank resolution regimes – although the rating agency noted that 95 programmes have benefited from extra uplift thanks to exemption from bail-in.

In a report on its outlook for 2015, published on Wednesday, Fitch said that around 22% of the 132 programmes it rates were either on negative outlook or Rating Watch Negative at the end of November. With these mainly relating to programmes from Italy, Portugal, Spain and Ireland, the rating agency has issued a split outlook for next year, with programmes from the peripheral Eurozone on negative outlook, while the rest of the world’s are stable.

Eight programmes are on negative outlook because of weaknesses in the intrinsic financial strength of the issuing bank or reference issuer, but the majority (17) were listed because they may be affected by downgrades of banks’ Issuer Default Ratings (IDRs) to their Viability Ratings, if sovereign support is withdrawn. Fitch noted that four of these 17 programmes could be downgraded to non-investment grade.

However, with covered bonds exempt from bail-in resolution frameworks in most jurisdictions, Fitch updated its criteria in early 2014, assigning IDR uplifts to reflect covered bond programmes’ beneficial position.

A total of 109 notches of uplift were assigned to 95 programmes, in many cases making up for issuer banks’ potential downgrades, resulting in greater buffers and higher protection, Fitch said. Twenty-six programmes issued on behalf of banks with IDRs on negative outlook remain on stable outlook as a result, the rating agency said.

“We don’t want to be too negative, because nearly 80% of Fitch-rated covered bond programmes have a stable outlook, and one has a positive outlook,” said Suzanne Albers, senior director of covered bonds at Fitch.

Fitch’s rating outlook is based on the agency’s assumption that inflation will remain low but positive in the Eurozone over the next two years, but the report notes that an unexpected heightened risk of deflation could negatively affect bank ratings, subsequently hitting covered bond outlooks.

Such a scenario could also increase cover pool loss forecasts, as borrowers’ real debt burdens would become harder to service and property values would fall. This, Fitch said, could lead to lower ratings being given for lower amounts of overcollateralisation (OC), especially for cover pools that include riskier assets.

Meanwhile Fitch said that certain trends could lead to lower breakeven OC levels.

The rating agency noted that refinancing spread assumptions have already decreased in 2014, particularly in the peripheral Eurozone.

“A continuous tightening of funding costs for banks, mortgage assets and sovereign debt could result in further lowering of stressed assumptions, subject to applicable floors,” Fitch said. “However, they are unlikely to reach the low pre-crisis levels.”

Considering that banks have reduced financing requirements and the low spread environment, reduced issuance is more likely to be in the form of longer-dated than shorter-dated covered bonds, according to Fitch. This should, it said, bring closer the redemption profile of cover assets to covered bonds, and reduce the amount of assets that must be refinanced should investors require recourse to the cover pool.

Bonds converting to the conditional pass-through (CPT) model would also eliminate the need to refinance cover pool assets, lowering OC requirements in the ratings of relevant programmes, Fitch added.

The rating agency also said that should CPT programmes become more widely accepted, this would again widen the difference between banks’ IDRs and their covered bond ratings.