The rating impact of the implementation of Fitch’s new covered bond criteria has been in line with expectations, the rating agency said yesterday (Tuesday), with 23 programmes upgraded and two downgraded as a result of the revised methodology, while three dodged cuts after OC levels were increased.

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 said at the time that 23 covered bond programmes – mainly those of peripheral issuers – could be upgraded as a result of the update and that six could be downgraded, unless their overcollateralisation levels were increased.

Yesterday afternoon, Fitch said that its rating actions following the update “are broadly in line with the agency’s expectations”.

While 23 programmes were upgraded, two were downgraded because of the update and another cut because of considerations independent of the new criteria, and two have been maintained or placed on Rating Watch Evolving. The ratings of a further 95 programmes have remained unchanged.

The rating agency noted that upgrades were mainly focussed in countries rated in the BBB category, namely Italy and Spain, and sub-investment grade countries Portugal and Greece, while two non-AAA UK programmes and two Irish programmes were also upgraded.

Around half of the upgrades were by one notch, and the main drivers of the upgrades were either higher IDR uplifts or higher Payment Continuity Uplifts PCUs.

Fitch added that due to changes in the eligibility criteria, 72 programmes benefited from a two-notch IDR uplift as opposed to 35 previously. Over all the programmes Fitch rates, the average IDR uplift amounts to 1.3 notches, up from 0.8 notches under the previous criteria. The average PCU amounts to 4.6 notches, compared with 3.2 notches of D-Cap previously.

The three downgrades all concerned German programmes – the mortgage and public sector Pfandbrief programmes of Berlin Hyp and the public sector programme of Commerzbank. Fitch noted that two of the downgrades resulted from a reduction in the IDR uplift to one notch, as the issuing bank’s (Berlin Hyp) IDR is support-driven. The third downgrade, that of Commerzbank’s public sector programme, was independent of the criteria implementation, reflecting significant changes to the cover pool composition.

The three ratings were withdrawn following the downgrades.

Fitch said a further three programmes avoided negative rating actions as their breakeven OC levels increased above the OC relied upon in its analysis.