DBRS has launched a request for comment (RFC) on the integration of Critical Obligation Ratings (CORs) as a reference point into its European covered bond methodology, noting that if the changes are implemented as proposed, 11 covered bond programmes may benefit from upgrades of up two notches

DBRS on Thursday assigned CORs – referred to as Preferential Obligation Ratings and Preferred Obligation Ratings in earlier proposals – to 33 European banking groups, following the publication of its new methodology last Tuesday.

The CORs address the risk of default of particular obligations and exposures at certain banks that are considered critical and are considered to have a higher probability of being excluded from bail-in than senior unsecured debt during an event of bank resolution.

The COR is generally two notches above the Intrinsic Assessment (IA) of banks, according to DBRS’s new methodology, except when the bank nears the point of resolution. Then, the notching may widen as the bank’s senior unsecured rating and IA are likely move down multiple notches due to the higher risk of bail-in.

In line with the new bank rating methodology, DBRS on Thursday also launched a request for comment on the integration of the CORs into its covered bond rating methodology.

Under DBRS’s current covered bond methodology, Covered Bonds Attachment Points (CBAPs) may be lifted up to two notches from an issuer’s senior unsecured rating for banks that are subject to the Bank Recovery & Resolution Directive or equivalent regimes.

As previously reported, for banks that have been assigned a COR and for which DBRS either regards the covered bond as important for the host jurisdiction or regards the covered bond programme as strategic for the funding of the primary activity of the issuer, the CBAP will be equal to the COR.

For issuers assigned a COR where this is not the case, the CBAP will be set at one notch below the COR, but floored at the senior unsecured rating.

All else being equal, the proposed changes to the covered bond methodology would have a positive effect on the ratings of 11 covered bond programmes, which could be subject to an upgrade of up two notches, DBRS said.

Vito Natale, head of European covered bonds and surveillance at DBRS, said this is because in some instances the CORs can be higher than the bank’s respective sovereign rating, which is not the case currently for CBAPs.

DBRS’s European covered bond ratings are concentrated in peripheral countries.

The RFC period will end on 7 March.