Fitch upgraded covered bonds issued off Programme II of National Bank of Greece (NBG) to B- yesterday (Monday), following an analysis of the programme’s overcollateralisation, while also affirming three other programmes.

The rating actions are the latest to follow changes Fitch made to its covered bond rating criteria on 26 October.

Fitch upgraded mortgage covered bonds issued out of National Bank of Greece’s Programme II from CCC+ to B-, on stable outlook. The rating agency also affirmed NBG’s Programme I at B-, Piraeus Bank’s mortgage covered bonds at B-, and Alpha Bank’s mortgage covered bonds at CCC+

The upgrade, and the affirmation of NBG’s Programme I and Piraeus’s covered bonds, followed an assessment of the programmes’ overcollateralisation (OC) levels. Fitch said the 25% contractual OC of NBG’s Programme I and II and the 63.14% OC committed by Piraeus offset credit loss in a B- stress scenario of 6.1%, 10.1% and 8.7%, respectively.

The maximum achievable rating for the three programmes is B-, as this is Greece’s country ceiling.

The minimum legal OC of 5.26% for Alpha’s programme is not sufficient to cover the programme’s credit loss of 8.5% in a B- scenario, which Fitch said exposes the covered bonds to substantial credit risk. Therefore, the rating agency assigns the programme a rating one notch lower than the B- maximum otherwise achievable.

“In Fitch’s view the probability of default of Alpha’s, NBG’s and Piraeus’ covered bonds could be associated with a speculative credit risk,” added the rating agency. “This qualitative assessment is based on the dual recourse nature of the instrument and on the availability of liquidity reserves and principal protection mechanisms.

“It further takes into account that Greek covered bonds are performing obligations and that timely payments of interest and principal have been made since the imposition of capital controls in 2015.”

In a variation from its usual criteria, Fitch rates Greek covered bonds based on a qualitative analysis of the covered bonds’ payment interruption risk and a quantitative analysis of the cover pool credit risk, as the Greek banks have Issuer Default Ratings (IDRs) of RD and Viability Ratings (VRs) of f.

Fitch noted that the issuer’s IDRs and VRs reflected an uncured payment default on obligations other than the covered bonds.

“Yet recourse against the cover pool has not been activated, a circumstance not explicitly envisaged in Fitch covered bonds rating criteria,” it said.

Fitch said it will begin applying IDR uplift and Payment Continuity Uplift (PCU) – which were introduced with the update to its criteria – when assessing the programmes if the issuers’ IDRs and VRs are upgraded.