DBRS has implemented an updated European covered bond rating methodology, integrating Critical Obligation Ratings (CORs) as a reference point as it had proposed, with the changes expected to have a positive impact on 11 covered bond programmes and a negative impact on two.

The rating agency published its new methodology for rating European covered bonds yesterday (Tuesday), following the conclusion on Monday of a request for comment period. The rating agency received no comments on the proposed changes.

DBRS in February assigned CORs to 33 European banking groups in countries under the Bank Recovery & Resolution Directive (BRRD), after publishing its wider financial institutions methodology.

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 Assessments (IAs) of banks, although the notching may widen in the event of a bank nearing the point of resolution.

Under DBRS’s previous covered bond methodology, Covered Bonds Attachment Points (CBAPs) could be lifted by up to two notches from an issuer’s senior unsecured rating for banks that are subject to the BRRD or equivalent regimes.

Under the new methodology, 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 now 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 issuer’s senior unsecured rating.

For all European covered bond programmes where the issuer is subject to a resolution regime that DBRS deems equivalent to BRRD, the rating agency’s previous approach applies.

DBRS said it expects the updated methodology will have a positive effect on the ratings of 11 covered bond programmes, which could be subject to upgrades of up two notches, and a negative effect on the ratings of two programmes, which could be subject to downgrades of up to two notches.

Vito Natale, head of covered bonds and surveillance at DBRS, said the 11 programmes are expected to be upgraded because in some instances CORs can be higher than the bank’s respective sovereign rating, which was not the case under the previous methodology.

He added that the two programmes are expected to be downgraded because the respective issuers are not sufficiently large and complex to be assigned CORs.