Fitch placed the mortgage covered bond programmes of Italian issuers Credito Emiliano and Mediobanca on Rating Watch Positive yesterday (Wednesday) following an update to the rating agency’s counterparty criteria.

Fitch on Monday updated its counterparty criteria for structured finance and covered bonds, which details its approach to addressing counterparty risk, noting at the time that the ratings of two of the 130 covered bond programmes it publicly rates could be positively affected.

The rating agency subsequently placed the OBGs of Credito Emiliano and Mediobanca, rated A+, on Rating Watch Positive to reflect the potential rating impact from its updated counterparty criteria.

“This clarifies that where the documented counterparty provisions are not fully in line with the criteria, the covered bonds can still be assigned a rating uplift above the maximum ratings envisaged by the criteria, provided that adequate protection is available to absorb counterparty-related losses at the OBG rating,” Fitch said

The rating agency noted that the A+ ratings of the programmes are currently constrained by, among other factors, the documented account bank replacement provisions.

It said that at present the maximum achievable rating for Credem’s OBGs is AA- and for Mediobanca’s AA. In accordance with its counterparty and covered bonds rating criteria, Fitch may reflect unmitigated counterparty risk in its discontinuity assessment and test the programmes’ asset percentage (AP) at the respective rating levels.

Fitch said the A+ ratings of the two programmes will be upgraded provided sufficient overcollateralisation (OC) is available in the programmes to protect against counterparty-related losses that may occur at rating scenarios above the A rating category, and that otherwise the ratings will be affirmed.

Credem and Mediobanca act as internal swap counterparty on the liability swaps, at 93% and 100% of the outstanding OBGs, respectively, Fitch said, adding that according to the swap documentation, the hedging providers are considered eligible to support ratings in the AA category with posting of collateral.

Fitch added that the rating action on Mediobanca’s OBGs also takes into account the annual review of the programme. It said it will implement the criteria changes and resolve the Rating Watches on both programmes within six months of the criteria publication date.