S&P expects reduced volatility in covered bond ratings this year, noting that they withstood the Eurozone debt crisis and that in 2015 upgrades outpaced downgrades for the first time since the crisis – something reflected in Moody’s research that showed peripheral programmes leading the way.

In a study of its covered bond rating movements since 2010, Standard & Poor’s on Thursday said that as a consequence of the Eurozone debt crisis, the European covered bond market is no longer dominated by AAA rated programmes – which represented 95% of the programmes it rated until early 2010.

However, in spite of the severity of the economic contraction, S&P said, its ratings on European programmes – especially on programmes from core European countries – have withstood the debt crisis and economic downturn and remained fairly stable since 2010. S&P noted that between 2010 and 2013, the number of downgrades exceeded the number of upgrades each year, with rating actions peaking in 2012, partly driven by collateral performance during the height of the crisis. By 2014, only 66% of rated programmes were rated AAA.

However, the proportion of upgrades to downgrades stabilised in that year, and then in 2015 upgrades outpaced downgrades for the first time since the Eurozone sovereign debt crisis began. According to S&P, this reversal was mainly due to the implementation of its updated additional loss-absorbing capacity (ALAC) criteria to European banks in December and an upgrade of Spain in October.

The rating agency added that, following the implementation of its revised covered bonds and bank criteria, and considering the stable outlook on most issuers and sovereigns that it rates, it expects reduced ratings volatility in 2016. As of January 2016, it said, more than 70% of outstanding European covered bond programme ratings were still AAA.

Ratings distribution for covered bond programmes (as of beginning of each year)

Source: S&P

Moody’s, in a sector comment also published on Thursday, noted that most of the rating actions it took on covered bonds in 2015 were positive. The rating agency updated its covered bond methodology last March to reflect the implementation of BRRD, switching the reference point for covered bond anchors to a new Counterparty Risk (CR) assessment.

“In particular, the positive impact of EU countries’ implementation of the Bank Recovery & Resolution Directive (BRRD) into law, and our consideration of it in our rating methodologies for bank and covered bond ratings triggered these rating changes,” Moody’s said. “This positive effect was further supported by the raise of our country ceilings in some European markets during 2015.”

Moody’s noted that of the 87 covered bond rating upgrades it issued in 2015, 85 were for European covered bonds, with the other two in the US and Panama. The majority of upgrades were for programmes from peripheral European countries, it said, resulting from higher covered bond anchors after the introduction of CR assessments.

“Although the vast majority of covered bonds benefitted from the higher anchors, covered bonds in the euro area periphery benefitted the most because many covered bonds in core euro area countries were already rated Aaa,” it said.

Moody’s noted that, in comparison, it downgraded the ratings of 12 programmes, from Austria, Greece and Russia.

Covered bond rating upgrades were on average 2.3 notches, while downgrades were on average 2.8 notches. The rating agency added that the share of covered bonds it rated Aa3 and above increased from 67.9% to 78.3% in 2015.