The most commonly used covered bond types in Europe’s five largest issuing countries will generally benefit from a maximum six possible jurisdiction-related notches of uplift from their issuer rating under Scope’s methodology, the rating agency has announced, but niche products will not.

In a report published on Friday, Scope analysed the fundamental factors that it considers explain the strong credit profile of covered bonds. Under the rating agency’s methodology, the most important driver of covered bonds’ credit differentiation are credit relevant aspects of legal frameworks and bank recovery and resolution regimes.

Up to two notches of uplift from a bank’s Issuer Credit Strength Rating are allowed based on Scope’s analysis of legal frameworks and up to a further four notches on an analysis of the relevant resolution regime. Three extra notches are allowed based on its cover pool analysis, which is issuer specific.

In the new report, Scope said that mortgage and public sector covered bonds from the largest issuing European countries – Denmark, France, Germany, Spain and Sweden – are generally deserving of the maximum possible credit differentiation, including the full six notches relating to legal frameworks and resolution regimes owing to their recognition as important financing tools.

“Covered bonds in the above countries are generally based on robust legal frameworks and have high systemic relevance supporting the classification,” the rating agency said. “The benefit of a local legal framework and local translation of BRRD generally apply to all issuers of the same covered bond type within that country.”

The only covered bond type from one of the five countries backed by either mortgage or public sector collateral but ineligible for the maximum of six notches of uplift are cédulas territoriales in Spain. The public sector-backed issuances are only allowed up to three notches of uplift based on Scope’s resolution regime analysis, as they are used by a smaller number of issuers and direct public sector lending is of lesser importance than mortgage lending in Spain, the rating agency said.

Meanwhile, more niche covered bond types, although eligible for the maximum two notches of legal framework-related uplift, will generally benefit from a smaller credit differentiation versus issuer ratings, Scope said.

Ship and aircraft-backed German Pfandbriefe can each achieve up to two notches of uplift based on Scope’s resolution regime assessment, because of the occasional use and lesser importance of the products.

“With only four issuers actively using ship covered bonds and only one issuer for aircraft covered bonds, the systemic importance of the products is very modest and does not merit in our view a specific benefit for this criteria,” Scope said.

Danish ship-backed covered bonds are also limited to two notches of uplift, with only one issuer using the product and some Eu5bn (Dkr37bn) of issuance outstanding. Scope said the product’s lesser level of stakeholder support is also evidenced by a 2014 derogation of ship covered bonds as eligible assets by the Danish central bank.

Scope also noted that certain issuer-specific factors could affect the fundamental analysis in its methodology, meaning the results highlighted in the report may not automatically apply to all covered bonds.