The bulk of the fine (€550,000) relates to covered bond ratings assigned in September and November 2015 that did not take into account cover pool analyses, which the European Securities & Markets Authority (ESMA) – which supervises EU credit rating agencies (CRA) – found was inconsistent with the methodology Scope had adopted earlier that year.

For example, when Scope on 23 September 2015 assigned its first covered bond ratings, awarding AAA ratings to the covered bond programmes of 12 issuers (covering 340 issues totalling €220bn) it did not factor in cover pool analyses, but based these on issuer ratings and legal and resolution frameworks. The ratings were unsolicited, based on public information, and the issuers did not participate in the rating process, Scope said at the time.

ESMA said today (Thursday) that Scope’s actions meant that 559 covered bond ratings out of 622 issued under the 2015 publicly-disclosed methodology were not conducted according to the rating agency’s methodology, which made reference to cover pool analysis.

The supervisory authority said Scope’s actions constituted a breach of the Credit Rating Agencies Regulation (CRAR).

“Methodologies must be systematic by design and applied systematically in producing ratings so that investors are protected from arbitrary decisions by a CRA to depart from its public methodology without an objective reason for doing so,” it said. “This is a key condition for ratings to remain sound and reliable.”

The remaining €90,000 of the fine relates to an update to Scope’s methodology involving “material changes” in 2016 where, according to ESMA, the rating agency did not inform it of its plans or consult with stakeholders, which it was obliged to under CRAR.

Furthermore, ESMA found that in relation to both issues Scope did not meet “the special care expected from a CRA as a professional firm in the financial services sector” and hence that the rating agency had committed the infringement negligently and was liable to a fine.

The issues first came to light when ESMA’s supervision department, in 2015, as part of its ongoing supervision of CRAs, started an assessment, among others, of Scope’s rating process and procedures for the review and validation of methodologies, involving requests for information and on-site inspections. ESMA also in 2015 received a complaint from an external stakeholder relating to Scope’s covered bond ratings. Following preliminary investigations, in 2018 the supervisory department concluded infringements may have occurred and referred the matter for further investigation, with ESMA’s board of supervisors making the ultimate finding.

Scope said today that it acknowledges ESMA’s decision and had made provisions for such a fine. It said it has entirely remedied the issues identified by ESMA and reinforced its internal controls regarding the application of the relevant regulations, and that none of its covered bond ratings have been affected as a result.

“ESMA’s decision in no way challenges the accuracy, independence and robustness of Scope’s covered bond ratings that were issued at the time,” said the rating agency. “The fine imposed by ESMA relates to Scope’s actions taken five years ago.

“At the time, Scope had inadvertently taken a different interpretation of relevant parts of EU legislation on credit rating agencies which turned out to be different from ESMA’s. Scope’s interpretation was undertaken in good faith.”

In its response to the fine, Scope said its early recognition of the lesser importance of cover pool quality for highly rated banks under the new EU bail-in regime is now standard across credit rating agencies in Europe.

According to the rating agency, it had the fourth largest European ratings coverage as of December 2019, covering over 100 banks and 39 covered bond programmes.

Around the time Scope assigned the ratings cited by ESMA, some market participants said the rating agency appeared to be seeking critical mass as it made a push in the covered bond market and sought greater recognition, notably from the European Supervisory Authorities (ESAs – the European Banking Authority (EBA), the European Insurance & Occupational Pensions Authority (Eiopa) and ESMA) and the European Central Bank.

Although Scope ratings have gained in this regard, it is not yet accepted by the ECB as an external credit assessment institution (ECAI) – only DBRS Morningstar, Fitch, Moody’s and S&P Global are.

Photo: Scope offices, Berlin

In its latest quarterly ratings review, published yesterday (Wednesday), S&P noted that it took no negative rating actions on euro-denominated covered bonds in the second quarter of 2017, and it expects this stability to continue through the second half of the year, citing improving credit conditions and expanding housing markets across Europe and noting that a historically low percentage of covered bond programmes have negative outlooks.

“Amid the many political changes and challenges, financing conditions in Europe have remained neutral to positive through the end of April,” it said. “Various central banks’ stimulus measures seemed to contribute to the region’s issuance in 2016 and its relative strength through 2017.

“These factors, combined with strengthening GDP in the region, suggest healthy issuance trends in the coming months.”

Last month the rating agency published revised criteria for rating covered bonds and RMBS backed by German, Austrian, Danish, and Swedish residential loans. Subsequently, the ratings of three mortgage covered bond programmes – those of WL Bank, Austrian Anadi Bank and Landshypotek Bank – are under review.

In January, S&P proposed changes to its methodology to incorporate the effect of resolution regimes into its covered bond ratings. These remain a work in progress, but the rating agency reiterated yesterday that, if implemented as proposed, these new criteria will have no rating impact on most covered bond programmes, all else being equal.

S&P added that it will monitor the development of the European Commission’s efforts to produce a harmonised EU covered bond framework.

S&P covered bond outlooks

Note: Includes both CreditWatch placements and outlooks; Source: S&P

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.

The rating agency published its updated criteria yesterday (Wednesday) after a consultation launched on 29 June when it released an exposure draft. It said the criteria are broadly in line with its initial proposals, but that it has made some adjustments to IDR uplift and taken a less quantitative approach to recovery uplift limitations following market feedback.

The main drivers of potential upgrades are higher Issuer Default Rating (IDR) uplifts or higher PCUs, or a combination of both, according to Fitch. Whereas 34 programmes previously benefited from a two notch IDR uplift, 72 do under its new criteria.

“Fitch now takes a broader view on European programmes eligible for an IDR uplift,” it said, “in line with the exemption of fully collateralised covered bonds and secured debt from bail-in under the EU Bank Recovery & Resolution Directive (BRRD),” it said.

“Soft bullet programmes with 12 month protection are generally eligible for a PCU of six notches compared with the current maximum D-Cap of four notches.”

Among those set to benefit from the new criteria are programmes from Greece, Ireland, Italy, Portugal and Spain, and potentially non-triple-A programmes from Norway and the UK.

The six programmes flagged as facing potential downgrades could be cut unless the overcollateralisation (OC) Fitch relies upon in its analysis is increased to a level that supports the current rating, it said. One programme could also be placed on Rating Watch Evolving.

The rating agency plans to apply the new criteria over the coming six months. Where OC levels fall short of updated breakeven OC levels for ratings, issuers will be given a week to tell Fitch that they will make additional OC available within a month and thereby avoid having their covered bonds put on Rating Watch Negative.

Overview of Covered Bonds Rating Steps

Note: PCU = Payment Continuity Uplift; OC = Overcollateralisation; PD = Probability of Default; RU = Recovery Uplift; Source: Fitch

Scope’s guidance on Austria is its first published analysis of a jurisdiction’s covered bond framework fundamentals since August of last year, when it published a similar comment on the legal frameworks and resolution regimes of the five largest covered bond issuing countries.

Under Scope’s covered bond rating methodology, the anchor point is a bank’s Issuer Credit Strength Rating. Above this, Scope allows two notches of uplift based on its analysis of legal frameworks and up to a further four notches for the resolution regime, and then up to three extra notches based on an issuer-specific cover pool analysis.

In yesterday’s report, Scope noted that Austrian covered bonds can be issued under three different frameworks. These frameworks are strongly aligned, it said, and can provide the maximum two notch credit differentiation, “but only meet minimum protective requirements by a small margin”. Scope sees room for improvement in the three legal frameworks – in particular relating to market and liquidity risk management guidelines.

The rating agency said the Austrian resolution regime then supports an additional credit enhancement of up to three additional notches – below the maximum uplift of four notches available in this element of its methodology.

“Currently, Scope views the systemic importance of covered bonds in Austria as lower than in other countries,” it said. “Further, stakeholder support is less pronounced, and regulatory supervision and its track record is not as predictable and strong as Scope would expect for countries that receive the full uplift from fundamental support.

“Regulatory actions impacting two Austrian banks that were either placed under a moratorium or split into a ‘good bank’ and a state-supported entity has resulted in heightened and prolonged uncertainty on the credit quality of the covered bonds, which in Scope’s view is not in line with the highest possible fundamental support.”

Scope said the credit support regarding the benefits of the resolution regime could be lowered if the agency believes the issuer’s business model, liability and capital structure are unlikely to incentivise regulators to maintain the issuer as a going concern. Credit support could also be limited if the relative importance and visibility of a covered bond issuer is not likely to result in covered bond-driven support, it said.

“These are the most important takeaways,” said Fuchs. “We see some potential for downward adjustment for certain Austrian issuers, depending on their importance and visibility.”

Karlo Fuchs, head of covered bonds at Scope Ratings, said the rating agency published its guidance after receiving requests for its view on the Austrian frameworks and resolution regimes.

Photo: Scope offices

In an exposure draft published on 29 June, Fitch proposed changes to its methodology that would modify the different uplift factors above Issuer Default Ratings (IDRs) that lead to the potential maximum covered bond rating, with the aim of “making some rating steps more focused on the most relevant credit aspects”.

The proposals include changes to the calculation of IDR uplift, the replacement of Discontinuity Caps (D-Caps) with a new Payment Continuity Uplift (PCU) focussing on liquidity protection, and a move towards a loss-driven assessment of recoveries given default.

The rating agency requested feedback from market participants on the proposed amendments, with the deadline for submissions 29 July.

The European Covered Bond Council’s rating agency approaches working group said today (Friday) that overall it supports Fitch efforts to try to make its covered bond rating criteria more transparent and simple to understand, as the D-Cap approach was sometimes considered a “black box”.

Luca Bertalot, secretary general of the EMF-ECBC, said the industry body had been consulted by Fitch and that the working group had discussed the proposed changes in a conference call with the rating agency.

“Our general feeling is that the ECBC’s members are very supportive of the changes proposed,” Bertalot told The CBR. “This is seen as an improvement.

“However, the common view of the working group is that some clarification is needed on specific points. These are the major issues we have identified in discussions with our members.”

The ECBC response said that on certain points the exposure draft does not clearly identify what the exact changes are and how programmes would be affected.

In particular, the response said that more information is needed on:

• How the proposed change in approach to determining uplift above the IDR will affect all programmes, especially with regard to the integration of an issuer with its parent in the same group in the IDR uplift approach.
• How refinancing spread level (RSL) assumptions for government bonds, sub-sovereign assets and residential and commercial real estate mortgage loans are derived, and how the existence of an active RMBS market in the countries is taken into account.
• How foreign exchange risk and hedging are taken into account.
• What exactly the differences are between the new more loss-driven approach to assessing recoveries given default and the current approach, as the information on the proposed changes regarding the recovery uplift could be viewed as vague.

On the new approach to assessing recoveries given default, the response said the members of the working group “consider that neither the new approach nor the reasons for the changes are entirely comprehensible”.

The members of the working group also said that in recent years Fitch has changed its methodology or relevant parts of its approach “quite often”, and expressed a preference for more stability going forward.

“It is important on the one hand to improve rating methodologies when there are changes to markets or regulatory frameworks, but on the other hand it is very important to maintain rating stability,” said Bertalot. “Changing too frequently can really jeopardise the stability of the market.

“This was a common view.”

Following the review period and consideration of responses received, Fitch expects to finalise and publish the criteria in the third quarter of 2016.

In an exposure draft published yesterday (Wednesday), Fitch proposed what a covered bond analyst described as “far-reaching” changes to its covered bond rating methodology that would modify the different uplift factors above Issuer Default Ratings (IDRs) that lead to the potential maximum covered bond rating.

These proposals include changes to the calculation of IDR uplift, the introduction of a new payment continuity uplift (PCU) focussing on liquidity protection, and a move towards a loss-driven assessment of recoveries given default.

The rating agency said the proposals are being made with the aim of “making some rating steps more focused on the most relevant credit aspects”.

Under the proposed changes, Fitch said it would assign an IDR uplift of up to two notches to programmes in jurisdictions with advanced resolution frameworks where fully collateralised covered bonds and secured debt are exempt from bail-in, and where Fitch believes payments will continue to be made without recourse to the cover pool even if the issuer has defaulted on its senior debt.

The pre-condition, Fitch said, is that the risk of undercollateralisation is sufficiently low at the point of resolution.

“This is because covered bonds could still be subject to bail-in for the liability value that exceeds the value of the cover assets against which they are secured,” the rating agency said. “Based on its review of legal frameworks and contractual documentation, the agency believes minimum OC requirements, dedicated supervision, eligibility criteria for cover assets, periodic mortgage assets valuation and the existence of an asset monitor are effective safeguards against such a risk in many countries where it rates covered bonds.”

Fitch said that most programmes it rates in jurisdictions eligible for an IDR uplift will therefore be assigned a two-notch uplift when the IDRs or reference IDRs are driven by the intrinsic strength of the bank as expressed by its Viability Rating (VR), whereas those with a support-driven reference IDR would be eligible only for a one notch uplift.

“There are, however, some notable exceptions,” added Fitch.

The rating agency said that in Austria, mortgage fundierte Bankschuldverschreibungen (FBS) are less well protected against undercollateralisation risk compared with European peers, because a legislative maximum loan-to-value for the financed mortgage loans are lacking. However, it noted that some issuers commit to coverage eligibility criteria, and said it may consider the risk of undercollateralisation for mortgage FBS as being sufficiently mitigated, making them eligible for an IDR uplift. Meanwhile, some public sector Austrian covered bonds may not be assigned IDR uplift, given unhedged FX risk.

In addition, Fitch said Polish listy zastawne may no longer be eligible for an IDR uplift if regulatory authorities exempt their issuers from compliance with the minimum requirement for own funds and eligible liabilities (MREL).

The new approach to IDR uplift will also consider the degree of integration of an issuing subsidiary into its banking group, Fitch said, with a two-notch uplift assigned to programmes of issuing entities with a support-driven IDR that are highly integrated into a parent whose IDR is VR-driven and which are likely to be resolved together in case of need. Programmes of entities with a support-driven IDR that may be resolved separately from their parent or group and programmes issued by subsidiaries of a parent whose IDR is support-driven will be assigned a one-notch uplift.

Fitch said that this new IDR uplift approach would substitute the three conditions it currently considers: the relative ease and motivation for resolution methods other than liquidation; the importance of covered bonds to a jurisdiction’s financial markets; and the buffer provided by senior unsecured debt.

Fitch is also proposing to replace its Discontinuity Cap (D-Cap) assessment with the new PCUs – which are expressed in notches above the IDR adjusted by the IDR uplift, ranging from zero to eight.

It said the PCUs will assess whether, once recourse against the cover pool is enforced, liquidity mechanisms are sufficient to protect against payment interruption risk deriving from maturity mismatches between the cover assets and the covered bonds. Other components of the outgoing D-Cap assessment could nevertheless still constrain the PCU.

“As a benchmark, programmes with strong liquidity provisions, such as a 12 month maturity extension, will be eligible for a six-notch uplift in developed markets,” Fitch said. “Programmes with a conditional pass-through amortisation will have a potential uplift of eight notches.”

Fitch said it is also proposing to move towards a loss-driven assessment of recoveries given default.

“This is a change from the current approach,” the rating agency said, “where calculations may suggest a higher precision than that implied by the recovery ranges used by Fitch – good (51%-70%), superior (71%-90%) and outstanding (91%-100%) – and in line with an uplift of one to three notches.”

Fitch expects that fully collateralised programmes secured by standard assets should be able to generate a good level of recoveries and will be eligible for a one-notch recovery uplift in all rating scenarios.

Programmes with OC that offsets at least stressed credit loss levels implied by Fitch’s static model output will, meanwhile, be eligible for a two-notch recovery uplift, or three notches if the tested rating on a probability of default (PD) basis is non-investment grade.

The assigned recovery uplift may, however, be one notch lower if Fitch identifies material downside risks to recovery expectations.

Also included in Fitch’s proposals are new refinancing spread level (RSL) assumptions for mortgage and public-sector cover pools – which are used in the rating agency’s cashflow modelling – to make them more comparable between asset types and jurisdictions.

Fitch said this revised approach generally results in substantially lower RSL assumptions for public-sector assets in countries rated A or lower, following the removal of certain credit risk premiums embedded in the peak observed spreads.

For example, Fitch said the AA RSL for Italian sovereign bonds would decline from 830bp to 300bp and the A RSL for Portuguese sovereign bonds would fall from 1500bp to 500bp.

But Fitch said that sovereign RSLs proposed for some countries in the high-investment-grade category are higher as a result of a qualitative overlay assessment, particularly in those countries without reserve currency flexibility or with a small-sized sovereign bond market on a relative basis. AAA sovereign RSLs for most Nordic countries would increase from 60bp to 100bp, for example.

Fitch said it tested the proposed changes on a sample of 68 of the 130 covered bond programmes it publicly rates. Out of this sample, 23 programmes are likely to be upgraded and 10 likely to be downgraded, it said.

The possible upgrades are mainly from the low-investment-grade countries of Italy, Spain and Ireland and the sub-investment-grade counties of Portugal and Greece, while upgrades are also considered likely among UK programmes not already rated AAA. The magnitude of upgrades is limited to one rating category, it added, with the exception of one Italian programme, which could be upgraded by five notches. The main drivers of these upgrades are either higher IDR uplifts, higher PCUs, or a combination of the two.

Fitch said the 10 programmes that would be likely to be downgraded are all in high-investment grade countries, and said these downgrades would likely be limited to one or two notches.

Two programmes would be affected by the removal or lowering of the IDR uplift as their issuers have support-driven IDRs; two are programmes that Fitch deems more at risk of undercollateralisation in the event of resolution; and one would be downgraded due to the removal of the recovery uplift due to a combination of currency mismatches and OC constraint.

A further five programmes could be downgraded due to the new recovery approach as the breakeven OC for their rating, which would be based on a higher tested rating on a PD basis, would be higher than the OC currently relied upon by Fitch in its analysis.

The rating agency deals with multi-issuer cédulas hipotecarias separately and said that about half of its 24 ratings of these such issuance could be upgraded by one notch.

Among the remaining 62 programmes not tested, Fitch does not expect further upgrades, as all non-AAA rated programmes that could be upgraded due to the combined proposals were included in the sample.

The rating agency added that the proposals could lead to an increase of the breakeven OC for the current rating of some programmes that have not been formally tested. However, it said further OC-related downgrades are unlikely, because many programmes maintain a higher OC than the breakeven OC for their current rating and issuers can generally increase collateral.

Fitch is requesting feedback from market participants on the proposed amendments, with the deadline for submissions 29 July. Following the review period and consideration of responses received, Fitch expects to finalise and publish the criteria in the third quarter of 2016.

Overview of Covered Bond Rating Steps

PCU: Payment Continuity Uplift; OC: Overcollateralisation; PD: Probability of default; RU: Recovery Uplift

Source: Fitch

DBRS released a draft of its new Preferential Obligations Rating (POR) criteria for a 30 day comment period on Monday. The new ratings – named Preferred Obligations Ratings in earlier proposals – would apply to particular obligations and exposures at certain banks that DBRS considers less likely to be bailed-in than senior unsecured debt during an event of bank resolution.

The rating agency said the PORs – which would typically be assigned to banks identified as global or domestic systemically important – would cover, among other obligations, the obligations of a bank as an issuer of covered bonds.

DBRS said that the POR would be expected to be two notches higher than a bank’s Intrinsic Assessment (IA) – which for all the European banks DBRS rates is currently equal to their senior unsecured rating – except when the bank nears the point of resolution. Then, it said, the notching will likely widen to reflect that in the event of senior debt being bailed-in it is more probable that the relevant instruments will avoid bail-in or insolvency and will be included in a going concern entity.

This comes after DBRS in September updated its covered bond methodology to allow Covered Bonds Attachment Points (CBAPs) to be lifted by up to two notches from the senior unsecured ratings of issuers to reflect the impact of the Bank Recovery & Resolution Directive (BRRD). DBRS said at that time that it would probably use PROs as the starting point for its analysis of covered bonds.

At an annual European event held by the rating agency in London on Wednesday, Vito Natale, head of European covered bonds and surveillance at DBRS, said that the proposed PORs would be consistent with its updated covered bond methodology.

He said that under DBRS’s plans, if an issuer has been assigned a POR, is active in a jurisdiction where covered bonds are systemic, and its cover pool assets are “core”, the CBAP for its covered bonds would be equal to the POR.

For covered bonds issued by a bank that has been assigned a POR but which is active in a jurisdiction where covered bonds are not systemic or for which the cover pool assets are not core, the CBAP would be one notch below the POR.

Covered bonds issued by a bank that does not have a POR but which is active in a jurisdiction where covered bonds are systemic could be assigned a CBAP up to one notch higher than the issuer’s senior unsecured rating.

Covered bonds issued by a bank that is neither assigned a POR nor active in a jurisdiction where covered bonds are systemic would be assigned a CBAP equal to the senior rating.

Natale said that the implementation of PORs into DBRS’s covered bond methodology is not expected to have any impact on the ratings of covered bond programmes.

The 30 day comment period for the PORs ends on 16 December.

DBRS rates 23 European covered bond programmes across Portugal, Spain, Italy and Ireland, and Natale said the rating agency is looking to consolidate its coverage in Italy and Spain and expand into other jurisdictions in 2016.

The rating actions are in line with the expected outcome announced when S&P put the covered bonds on review on 30 April following an update to its multi-cédulas methodology published on 31 March.

Under its new approach, the rating agency assesses the creditworthiness of the individual mortgage covered bonds (cédulas hipotecarias) backing the multi-cédulas, S&P said, and then determines the maximum achievable rating by constraining it at the level of the weakest cédulas included.

“Following the abovementioned ‘weak-link’ approach, today’s upgrades reflect that the lowest assessment or rating on the cédulas hipotecarias backing the multi-cédulas portfolio exceeds the current ratings on the multi-cédulas,” the rating agency said. “Where we have lowered our ratings, this is because at least one of the cédulas hipotecarias participating in those multi-cédulas is rated or has been assessed at a lower rating than the current multi-cédulas ratings.”

Seven multi-cédulas also had their ratings affirmed.

When S&P does not rate an underlying cédulas or the respective issuing bank, it bases its opinion of the credit quality of the cédulas only on the collateral. And when it does not rate the issuing bank, S&P’s criteria limits its rating of the cédulas at BBB+.

“S&P rates fewer than 50% of all outstanding single-cédula programs,” said Michael Spies, covered bond and SSA strategist at Citi. “This essentially made it necessary to assess the cover pool quality for those programs that are not rated.

“As many unrated programs are found in several multi-cédulas, we already expected S&P to rate all multi-cédulas in the triple-B area. And this was confirmed.”

The rating action took in issuance off several multi-cédulas platforms: AyT Cédulas Cajas, Cédulas Grupo Banco Popular, Cédulas TdA, IM Cédulas and Pitch.

Ten issues were lifted out of junk territory, with AyT Cédulas Cajas Global Series XII and XIV, for example, upgraded from BB- to BBB-. They had been the multi-cédulas with the lowest ratings from S&P and the three notch upgrades were the equal highest yesterday alongside that of IM Cédulas 5, which was raised from BB+ to BBB+. Four AyT Cédulas Cajas issues were meanwhile downgraded by three notches from A+ to BBB+, which were the biggest downgrades together with a similar cut to a Cédulas Grupo Banco Popular issue.

“Those multi-cédulas that were upped from sub-investment-grade should obviously find support,” said Spies. “However, we think IM Cédulas 06/20 clearly stands out in this regard after the upgrade from BB+ to BBB+.

“The structure is one of the few that are solely rated by S&P. This means that the agency’s credit assessment is a main driver of demand for the multi-cédulas.”

He noted that the IM Cédulas issue trades some 50bp wider than an AyT Cédulas Cajas issue in the same part of the curve that was cut to BBB+ and is thus now similarly rated.

The rating agency announced the move on Friday after having last Wednesday placed 38 European banking groups under negative review because under BRRD and equivalent regimes there is less certainty around the likelihood of timely systemic support for the related systemically important banks.

Under its proposals, the CBAP can be notched up from the senior unsecured rating of the reference entity by up to two notches – previously, from their introduction in December, CBAPs were for European programmes the same as senior unsecured ratings.

DBRS said that the level of notching will depend on its assessment of two main factors: the importance of the reference entity for the economic and financial system of the relevant country; and the importance of covered bonds as an instrument for the economic and financial system of the relevant country and for the core business of the reference entity.

The rating agency expects, all else being equal, that the proposed changes will have a neutral to positive effect on all European covered bonds it rates. It noted that 10 out of 16 reference entities that it publicly rates were put Under Review with negative implications in the aforementioned bank rating actions, and that the ratings of Banco Comercial Português (BCP), Banca Monte dei Paschi di Siena were already under negative review and that of Novo Banco already under review with direction uncertain, with those reviews continuing.

“As a result, both the direction and the size of the combined impact is uncertain,” it said, “however, DBRS expects that, for the large majority of covered bond programmes, the net effect would be neutral.”