Austrian covered bond ratings can benefit from only three out of a maximum four notches of uplift available to reflect resolution regimes under Scope’s methodology, the rating agency said yesterday (Monday), citing the country’s track record and the relatively lower importance of covered bonds.

Scope’s guidance on Austria is its first published analysis of a jurisdiction’s covered bond framework fundamentals since August of last year, when it published a similar comment on the legal frameworks and resolution regimes of the five largest covered bond issuing countries.

Under Scope’s covered bond rating methodology, the anchor point is a bank’s Issuer Credit Strength Rating. Above this, Scope allows two notches of uplift based on its analysis of legal frameworks and up to a further four notches for the resolution regime, and then up to three extra notches based on an issuer-specific cover pool analysis.

In yesterday’s report, Scope noted that Austrian covered bonds can be issued under three different frameworks. These frameworks are strongly aligned, it said, and can provide the maximum two notch credit differentiation, “but only meet minimum protective requirements by a small margin”. Scope sees room for improvement in the three legal frameworks – in particular relating to market and liquidity risk management guidelines.

The rating agency said the Austrian resolution regime then supports an additional credit enhancement of up to three additional notches – below the maximum uplift of four notches available in this element of its methodology.

“Currently, Scope views the systemic importance of covered bonds in Austria as lower than in other countries,” it said. “Further, stakeholder support is less pronounced, and regulatory supervision and its track record is not as predictable and strong as Scope would expect for countries that receive the full uplift from fundamental support.

“Regulatory actions impacting two Austrian banks that were either placed under a moratorium or split into a ‘good bank’ and a state-supported entity has resulted in heightened and prolonged uncertainty on the credit quality of the covered bonds, which in Scope’s view is not in line with the highest possible fundamental support.”

Scope said the credit support regarding the benefits of the resolution regime could be lowered if the agency believes the issuer’s business model, liability and capital structure are unlikely to incentivise regulators to maintain the issuer as a going concern. Credit support could also be limited if the relative importance and visibility of a covered bond issuer is not likely to result in covered bond-driven support, it said.

“These are the most important takeaways,” said Fuchs. “We see some potential for downward adjustment for certain Austrian issuers, depending on their importance and visibility.”

Karlo Fuchs, head of covered bonds at Scope Ratings, said the rating agency published its guidance after receiving requests for its view on the Austrian frameworks and resolution regimes.

Photo: Scope offices