Fitch has kicked off an anticipated wave of upgrades to covered bond programmes following an update to its methodology last month, raising the ratings of four Spanish programmes and the covered bonds of one Slovak and one Austrian issuer on Friday afternoon.

On 26 October Fitch implemented changes to its covered bond rating criteria that, among other revisions, replaced Discontinuity Caps (D-Caps) with Payment Continuity Uplifts (PCUs), and reflected a broader view on eligibility for Issuer Default Rating (IDR) uplift. The rating agency highlighted that 23 covered bond programmes – mainly those of peripheral issuers – could be upgraded as a result of the update, mainly driven by higher IDR uplifts or PCUs.

The rating agency then on Friday afternoon upgraded the ratings of three Spanish mortgage-backed covered bond programmes and one Spanish public sector covered bond programme, following the implementation of the new criteria and a full sector review for all the Spanish programmes it rates.

The covered bonds upgraded are:

Abanca Corporación Bancaria cédulas hipotecarias, from BBB+ to A

Caja Laboral Popular Cooperativa de Crédito (Caja Laboral) cédulas hipotecarias, from A+ to AA+

Caja Rurales Unidas (Cajamar Caja Rural, or CRU) cédulas hipotecarias, from BBB to BBB+

Caja Rurales Unidas cédulas territoriales, from BBB- to BBB+

The ratings of three cédulas hipotecarias programmes were also affirmed: Bankia’s at A, Banco Santander’s at AA, and Banco Mare Nostrum’s at BBB+.

The cédulas hipotecarias of Abanca, Bankia, Banco Mare Nostrum, Caja Laboral and Santander are all rated four notches above the respective bank’s IDR, based in each case on a newly assigned IDR uplift of two notches, a PCU of zero notches, and a maximum recovery uplift of two notches. The two programmes of Cajamar are rated five notches above the bank’s IDR, based on a newly assigned IDR uplift of two notches, a PCU of zero notches and a maximum recovery uplift of three notches.

The programmes of Abanca, Bankia, Banco Mare Nostrum, Caja Laboral and Santander have been assigned the maximum two-notch IDR uplift because the banks’ IDRs are driven by their Viability Ratings (VR). Cajamar’s two programmes have been assigned a two-notch IDR uplift because its IDR is based on the bank’s participation/integration in a mutual support scheme.

Fitch assigned a PCU of zero notches to all the Spanish programmes it rates, because of a lack of specific liquidity protection mechanisms in the country’s framework to bridge temporary shortfalls after the recourse to the cover pool has been enforced. The rating agency notes that Spanish covered bonds have hard bullet maturities while the cover assets gradually amortise.

The maximum recovery uplift for the seven programmes varies between two and three notches depending on whether the tested rating on a probability of default (PD) basis is investment or speculative grade. Each programme benefits from the maximum possible recovery uplift because the relied-upon overcollateralisation (OC) which Fitch takes into account compensates for credit losses modelled in a stress scenario corresponding to the respective covered bond ratings.

The mortgage covered bonds of Slovenská Sporiteľňa were upgraded by Fitch from A to A+. The rating is based on the Slovak bank’s IDR of BBB+, a newly assigned IDR uplift of two notches and a recovery uplift of one notch. Having previously had a D-Cap of one notch, the programme was assigned a two-notch IDR uplift, as the bank’s long term IDR is driven by its Viability Rating.

Fitch rates the Slovak issuer’s covered bonds based on a limited rating uplift approach, meaning that the recovery uplift for the programme is limited to a maximum of one notch, and that it has not assigned the programme a PCU. The rating agency said it could not perform a full analysis on the covered bond programme as it is still in the process of forming assumptions for its credit analysis.

“We expect that performance data provided by the issuer will allow a full and robust analysis and may lead to the assignment of an additional notch of recovery uplift in future,” it said.

The rating agency also upgraded the mortgage covered bonds of Volksbank Wien, from BBB to BBB+, based on the bank’s IDR of BB+, a newly assigned IDR uplift of two notches and a recovery uplift of one notch.

The Austrian issuer’s programme is also rated on a limited rating uplift approach because available performance information does not enable a full asset analysis, Fitch said. As with Slovenská Sporiteľňa’s programme, the recovery uplift is therefore limited at a maximum of one notch, and no PCU has been assigned.