Covered bonds of Alpha Bank and National Bank of Greece could be upgraded to investment grade by Fitch after it raised the Greek country ceiling, with Commerzbank analysts foreseeing performance for Alpha in particular, after NBG recently won the first IG rating in years.

On Friday, Fitch upgraded the Greek sovereign from B to BB-, citing the country’s impending successful exit from the European Stability Mechanism (ESM) programme next Monday, a continued improvement of public finances, and a substantially improved working relationship between Greece and its European creditors.

Among other rating actions, Fitch also revised the Greek country ceiling from BB- to BBB-.

Fitch rates the covered bonds of three of the four Greek covered bond issuers, Alpha, NBG and Piraeus. Each of the programmes is rated BB-, at the previous country ceiling.

The country ceiling had constrained the ratings of the two NBG covered bond programmes that Fitch rates – a soft bullet and a CPT programme – and Alpha’s soft bullet programme, while Piraeus’ programme currently has insufficient overcollateralisation to be assigned a higher rating, according to Michael Weigerding, research analyst at Commerzbank.

“Given that Alpha’s and NBG’s covered bond ratings are notched from the issuers’ ccc+ Viability Ratings and the total rating uplifts add up to 11 notches (soft bullets) and 13 notches (CPTs), there is ample leeway for potential upgrades,” he said. “Thus, Alpha’s and NBG’s bonds should benefit from the higher country ceiling and could be upgraded to BBB- provided there is enough overcollateralisation.”

Each of the big four Greek banks has issued benchmark-sized public or privately placed covered bonds since the Greek market was reopened in October 2017. All of the deals were rated below investment grade at the time of launch.

Last month, NBG was assigned the first investment grade rating of a Greek issue since 2011. On 6 July, S&P assigned a new BBB- rating to NBG’s CPT programme, off which it issued the EUR750m three year deal that reopened the market.

As a result, the benchmark deal became eligible for ECP repo and its spread subsequently tightened by some 55bp. The spread of Eurobank’s outstanding benchmark also tightened around 45bp, even though it was not directly affected, noted Weigerding.

“In contrast, Alpha’s benchmark did not benefit to any comparable extent,” he said. “We believe this was due to the fact that Alpha’s programme features soft bullet maturities and is therefore less likely to achieve an investment grade rating with S&P than the CPT structures of NBG and Eurobank.

“However, a Fitch upgrade to investment grade would likely close this gap. We thus see catch-up potential for Alpha’s February 2023.”

If Fitch were to upgrade Alpha’s covered bonds to investment grade, this would make its issuance eligible for ECB repo, too, according to Weigerding. The assigning of a second investment grade rating to NBG’s covered bonds would lower their risk weights as defined under CRR Article 129 from 50% to 20%, he added.

An official at one of the Greek issuers said he expects Moody’s to also raise the Greek country ceiling to investment grade in the coming months.

Commerzbank’s Weigerding agreed that there is potential for Moody’s to raise its Ba2 country ceiling, after the rating agency changed its outlook on the country to positive, with its next review on Greece scheduled for 21 September.

He added that the Greek rating landscape could also continue to improve as other issuers could – like NBG – overhaul the structure of their rating mandates.

In a report published 16 July, Fitch said Greek covered bond issuance has gained substantial momentum thanks to improved market confidence and the proven strength of the country’s covered bond framework.

The rating agency noted that the outstanding balance of Greek mortgage covered bonds it rates had increased from EUR2.2bn as of end-2016 to EUR8bn as of May 2018, with public and privately placed series representing about 27% of new issuance. Over the same period, the aggregate cover pools’ size has increased from around EUR3.5bn to EUR11bn.

Photo: Alpha Bank