DBRS has updated its EU covered bond methodology to allow Covered Bond Attachment Points (CBAPs) to be notched up from senior unsecured ratings of issuers, and has proposed Preferred Obligations Ratings (PORs) for exposures expected to be treated preferentially in resolution.

DRBS published the updated covered bond methodology on Tuesday of last week (8 September) after a request for comment (RFC) period launched in May (see here for further details), and it now allows for CBAPs to be up to two notches higher than the senior unsecured rating of the reference entity rather than being the same.

Upon releasing the RFC in May, DBRS said that the proposed changes would have a neutral to positive effect on the European covered bonds it rates, but Vito Natale, head of covered bonds at DBRS, said today (Thursday) that the rating agency’s financial institutions analysts are reviewing how sovereign support is reflected in bank ratings and that the net impact of the two changes is expected to be neutral for most covered bonds.

Publishing its covered bond update, the rating agency noted that it had not received any responses to its RFC, but said that external commentators had nonetheless raised queries over some of its proposals and it has now addressed these.

DBRS said it has provided clarifications of how some qualitative factors are included in its analysis and it has also listed those jurisdictions where it deems covered bonds to be a particularly important funding instrument – one of two key considerations affecting the extent to which CBAPs can be notched up from reference entity senior unsecured ratings (the other being whether the issuer is considered systemically important, which is determined by the rating agency’s financial institutions group rather than its covered bond team).

Countries where covered bonds are a particularly important funding instrument, under DBRS’s analysis are: Denmark, Germany, Ireland, France, Spain and Sweden.

DBRS said commentators also noted that the linkage of a CBAP to a senior unsecured rating (SUR) could result in ratings volatility in the course of the bail-in of a reference entity (RE).

“In response, DBRS clarifies in the final version of the methodology that, in the immediate aftermath of a successful resolution where the bail-in tool is applied and the covered bond programme in its entirety remains with the going-concern part of the RE in resolution, DBRS expects that the CBAP would decouple from the SUR,” it said.

The rating agency noted that it had, on the same day, announced its intention to introduce Preferred Obligations Ratings for the European banks that it rates.

“This rating will cover obligations/exposures at certain banks where DBRS considers that the instruments have a higher probability of remaining in a going-concern entity at the point of resolution of the broader entity,” it said.

“DBRS considers that the analytical reasoning behind the Preferred Obligations Ratings is similar to the one underpinning the determination of the CBAP. To the extent that the Preferred Obligations Ratings are introduced, it is likely that they will provide the starting point for the covered bond analysis.”

Moody’s introduced Counterparty Risk assessments in March and Fitch has said it is considering a similar move.