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“ End of an erAAA ”


In proposing a new methodology for rating covered bonds, S&P finally


says goodbye to the ‘de-linked’ rating approach, a key point of differentiation of S&P’s methodology from that of Moody’s and Fitch.


tandard & Poor's new methodology proposal for covered bonds will have issuers everywhere on red alert. If implemented, they could see the credit ratings of more than half of Europe's covered bonds come under pressure. The news is obviously negative for the product, but the changes will essentially link the rating of the issuer with the covered bonds themselves. This will bring S&P’s methodology into alignment with those of Moody's and Fitch. S&P estimates that approximately 60% of the programmes by number would not meet the proposed minimum rating guidelines for covered bond issuers. A large number of the bonds would also have to increase their over-collateralisation to maintain current ratings. The proposals would put more emphasis on the ability of


S Covered bond issuance activity, before/after ECB announcement, May 7 2009 160 120 Regarding liquidity risk 80 40 0 Jan - Apr 2009 Source: UniCredit Research Since May 7, 2009


Fitch Ratings has also been reviewing its procedures, particularly with regard to how it evaluates the sticky subject of liquidity risk within covered bond programmes. Overall, the proposed amendments would lead to a tighter rela- tionship between the issuer default rating of a financial institution and its covered bond rating. The level of over-collateralisa- tion between the cover assets and covered bonds in line with a given rating scenario is expected to increase.


Other aspects of the Fitch covered bonds rating methodology remain unchanged.


June 2009 | ifr special report | 9 RATINGS


A new threat to the covered bond recovery has emerged in the form of the rating agencies. New rating proposals from S&P pose a risk that up to 60% of covered bonds could lose their Triple A status, while Fitch might downgrade up to 5% of public sector and 10% of mortgage covered bonds. Andrew Perrin investigates where the agencies are in the process, and what impact the proposals would have.


covered bonds to access liquidity to repay investors in the event of an issuer default. While S&P has not downgraded any covered bonds so far, such actions would become more frequent as the ratings of issuers came under pressure, said Karen Naylor, head of European covered bond ratings at S&P.


"In proposing a new methodology for rating covered bonds, S&P finally says goodbye to the ‘de-linked’ rating approach," said Heiko Langer, a covered bond strategist at BNP Paribas. "De-linking the covered bond rating from the issuer rating has been a key point of differentia- tion of S&P's methodology from that of Moody’s and Fitch."


When S&P initially made the announce- ment earlier this year, the agency requested market feedback on the proposal during a period that was extended until March 27. The agency was still digesting what it described as an extensive and detailed response from the market when this report was filed, much of which was quite critical of the proposals according to market sources. There was no official date earmarked for further an- nouncements as the report went to press.


BNPPCB 14 ACACB 16 LBBW 14 DPB 14 EURHYP 14 SOCGEN 19 SEB 14 CRH 19


BNPPCB 12 SANTAN 14


WLBANK 14


DEXMA 21 CAIXAB 14


EURHYP 16


BPCOV 14 INTNED 19


DEXGRP 14


ERSTBK 16 BANEST 13


SPNTAB 14 DB 16 CFF 21


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