Fitch could upgrade 23 covered bond programmes, mainly from the periphery, and downgrade six highly-rated programmes after finalising an update to its rating criteria, under which many IDR uplifts have improved and with D-Caps being replaced by Payment Continuity Uplifts (PCUs).

The rating agency published its updated criteria yesterday (Wednesday) after a consultation launched on 29 June when it released an exposure draft. It said the criteria are broadly in line with its initial proposals, but that it has made some adjustments to IDR uplift and taken a less quantitative approach to recovery uplift limitations following market feedback.

The main drivers of potential upgrades are higher Issuer Default Rating (IDR) uplifts or higher PCUs, or a combination of both, according to Fitch. Whereas 34 programmes previously benefited from a two notch IDR uplift, 72 do under its new criteria.

“Fitch now takes a broader view on European programmes eligible for an IDR uplift,” it said, “in line with the exemption of fully collateralised covered bonds and secured debt from bail-in under the EU Bank Recovery & Resolution Directive (BRRD),” it said.

“Soft bullet programmes with 12 month protection are generally eligible for a PCU of six notches compared with the current maximum D-Cap of four notches.”

Among those set to benefit from the new criteria are programmes from Greece, Ireland, Italy, Portugal and Spain, and potentially non-triple-A programmes from Norway and the UK.

The six programmes flagged as facing potential downgrades could be cut unless the overcollateralisation (OC) Fitch relies upon in its analysis is increased to a level that supports the current rating, it said. One programme could also be placed on Rating Watch Evolving.

The rating agency plans to apply the new criteria over the coming six months. Where OC levels fall short of updated breakeven OC levels for ratings, issuers will be given a week to tell Fitch that they will make additional OC available within a month and thereby avoid having their covered bonds put on Rating Watch Negative.

Overview of Covered Bonds Rating Steps

Note: PCU = Payment Continuity Uplift; OC = Overcollateralisation; PD = Probability of Default; RU = Recovery Uplift; Source: Fitch