NIBC expects to have a potentially ground-breaking conditional pass-through covered bond programme operational in September, according to an official at the issuer. Meanwhile, Fitch yesterday (Wednesday) cut the Dutch bank’s existing programme.

“The new conditional pass-through programme is coming along nicely,” the NIBC official told The Covered Bond Report. “We have almost completed the structuring and are about to start the registration with the Dutch Central Bank.”

Registration with the Dutch central bank would make the programme Ucits compliant.

The issuer expects to have the programme operational around September, added the NIBC official.

The establishment of the programme comes after the issuer sought investor feedback late last year and early this year on pass-through structures.

From an issuer point of view, a pass-through format would entail rating benefits by eliminating the potential need for a fire-sale of cover pool assets in the event of an issuer default, with concomitant savings on overcollateralisation another attraction. The prospect of higher and more stable ratings was cited by an NIBC official when the bank’s interest in issuing pass-through covered bonds came to light earlier this year. (See here for previous coverage.)

Investor appetite for pass-through covered bonds (outside Denmark’s unique system) is almost completely untested. Issuance with partial pass-through structures has been confined to deals structured to be used as repo collateral and an SME backed structured covered bond launched by Commerzbank in February. Any NIBC covered bond off the new programme that is placed with end investors would therefore be the first publicly sold covered bond issued under a legislative framework.

NIBC last tapped the benchmark covered bond market in March 2011, and the lack of issuance in over than two years has led Fitch, under criteria revised in September 2012, to treat the issuer’s programme as “dormant”, an assessment the issuer has disputed. (See here for more.)

The rating agency yesterday cut NIBC’s covered bonds from AA-, negative outlook, to A+, stable outlook. The rating action followed a downgrade of the issuer the day before, from BBB to BBB-.

Fitch’s view of the programme as dormant reduces the covered bond ratings’ maximum uplift above the issuer rating. Because the rating agency considers the programme dormant it lowers the cover pool specific component of the Discontinuity Cap (D-Cap) by one notch, to “moderate high”. This in turn drives a D-Cap of 3, which in combination with a BBB- issuer default rating constrains the covered bonds’ rating at A- on a probability of default basis, with two notches of uplift for recoveries.

ING Bank analysts noted that a pass-through format would support a D-Cap of 8 at Fitch, which on a probability of default basis, i.e. excluding any uplift for recoveries, would allow for a AA+ covered bond rating.