UK covered bonds’ ratings would probably not be directly affected by the UK leaving the EU, Standard & Poor’s said yesterday (Monday), citing mitigants against three potential negative consequences of Brexit: a fall in house prices, a fall in sterling, and a downgrade of the UK.

The rating agency said that the UK leaving the EU would not directly affect its analysis of the underlying collateral backing UK covered bond programmes. Regarding mortgage-backed issuance, S&P noted that it already factors into its analysis the potential for a decrease in house prices given that it considers UK residential property to be significantly overvalued. It added that for two public sector programmes – backed by loans to local authorities and to social housing associations – Brexit would have no direct consequences on the vast majority of the cover assets.

Regarding sterling, S&P said that while it could fall sharply, all the programmes it rates either have issuance exclusively in the UK currency or are fully hedged against such currency risk.

The rating agency also said that unused notches of uplift under its analysis of UK programmes means that a sovereign downgrade of up to two notches would not in and of itself directly affect its covered bond ratings.

S&P noted that its criteria take into account the preferential status enjoyed by covered bonds under the EU Bank Recovery & Resolution Directive (BRRD), but said that this directive has been transposed into UK laws and regulation and that it does not foresee Brexit leading to a change in this mechanism for UK banks.