Fitch and Moody’s have raised their expected ratings for covered bond issuance due from Kookmin Bank to triple-A, reflecting amendments to mitigate currency transferability and convertibility risks and increased overcollateralisation in the South Korean bank’s programme.

The market has been anticipating a 144A/Reg S dollar issue from Kookmin since the issuer completed a roadshow promoting its programme on 25 June, with leads BNP Paribas, Citi and Société Générale. The deal would be the first issued under a South Korean legislative framework brought in last year.

The two rating agencies announced the upgrades today (Thursday), with Fitch raising the $8bn (Eu7.1bn, Won9.25tr) programme’s rating from AA+ to AAA and Moody’s from Aa1 to Aaa.

They said their upgrades are a result of the incorporation into the programme of structural mechanisms to cover currency transferability and convertibility (T&C) risks in South Korea and an increase in the overcollateralisation (OC) in the cover pool.

Fitch and Moody’s said this is sufficient to allow the programme one notch of uplift from Korea’s country ceiling, which they set at AA+ and Aa1, respectively.

The rating agencies noted that under the amendments a counterparty rated at least A/F1 for Fitch or with a Counterparty Risk assessment of Aa3 for Moody’s will be used to hedge the currency mismatch between any foreign currency-denominated covered bond issues from the programme and its South Korean won cover pool.

Moody’s cited the OC in the cover pool as increasing from 17% to 21% on a “committed” basis, while Fitch said the asset percentage (AP) to be disclosed in the issuer’s investor report is expected to be equal to or lower than the rating agency’s breakeven AP for a AAA rating of 83.5%, which corresponds to a breakeven OC of 19.8%. This provides more protection than Fitch’s previous AA+ breakeven AP of 85.5%, it said.

Fitch added that when it considers a stressed valuation of the cover pool following a covered bond default and swap termination, also assuming Kookmin would have multiple bond issuances outstanding, the breakeven OC is sufficient to cover a South Korean won devaluation that leads to foreign currency bonds becoming more than three times more expensive over the next four years.

Kookmin has issued a covered bond previously, selling a $1bn deal in 2009. However, that was done on a contractual basis and the only other issuance from the country has been by Korea Housing Finance Corporation under legislation specific to the state-owned institution and which pooled collateral from several Korean banks.