FITCH: GLOBAL COVERED BOND RATINGS MAJOR PROVEMENT ON PREVIOUS YEARS.
Fitch Ratings says there has been a sharp turnaround in covered bond rating Outlooks in 2015. Of the 127 covered bond programme rated with Outlooks by Fitch on the international scale at 1 December 2015, 94% had a Stable Outlook and 5.5% 15% of non 'AAA' programmes were on Positive Outlook. This is a marked contrast from previous years as roughly 20% of Fitch's covered bond ratings, mainly peripheral eurozone programmes, were on Negative Outlook between 2011 and 2014, influenced by the impact of the financial and eurozone debt crises on banks' and sovereigns' Issuer Default Ratings (IDR).
The main drivers of changes in covered bond ratings and Outlooks have generally been movements in sovereign and bank IDRs and Outlooks. Fitch expects this to be less acute in 2016, given a greater de-linkage between bank and sovereign ratings. Following widespread downgrades of bank IDRs to their Viability Ratings in 2015 related to Fitch's view that sovereign support could no longer be relied upon for banks in the EU, US and Switzerland due to substantial progress in bank resolution, the Outlooks on most covered bond issuers rated by Fitch were Stable (76%) or Positive (12%) as at 1 December 2015.
Fitch expects the influence of sovereign ratings on those of covered bonds, if any, to be insignificant in 2016. Greek covered bond ratings have demonstrated greater volatility, mirroring movements in the sovereign IDR and Country Ceiling and there remains uncertainty although Fitch expects them to be exempt from any bail-in. Elsewhere, most Fitch rated programmes are established in countries with sovereign ratings with Stable Outlook s. Some countries, where covered bond ratings are on Positive Outlook, are on Positive Outlook, such as Ireland (A-) and Portugal (BB+). Only Belgium in on Negative Outlook among countries where Fitch rates covered bonds.
The adoption of covered bonds maturity extension, a growing trend since 2005, could be credit positive if it results in a longer protection timeframe. For instance, the rating uplift of cedulas above their issuer rating would increase if a 12-month principal extension is adopted along with protection against interest payment interruption risk, under the Spanish framework currently under consultation. In Germany, ratings are unlikely to be impacted even if the new arrangement provided more comfort, as the liquidity gap assessment for Pfandbriefe is already at the maximum which Fitch assigns to programmes with maturity mismatches. In Poland, where a conditional pass-through profile will be in place for covered bonds from January 2016, upgrades for Listy Zastawne will be contingent on the full analysis of the cover pool, and depend on the extent of foreign exchange rate risk.
As at 1 December 2015, only 31% of the 129 programmes rated by Fitch on the international scale had pure hard-bullet maturity profile and a further 15% had a mix of hard and soft bullets within the programme. Fitch currently rates 17 pass-through programmes. A conditional passthrough amortisation profile is associated with lower break even over collateralization (OC) for the rating, since it eliminates the need to refinance cover assets in order to make timely payments on the bonds.
Other potential sources of lower breakeven OC as per Fitch's calculations would include a possible reduction in Fitch's refinancing spread level assumptions and improvements in mortgage markets. The current very low funding costs are possibly not a reliable benchmark for the future, given that it is driven by the massive central bank purchase programmes. However, the agency will consider whether the extreme levels observed at the peak of the euro zone sovereign crisis are likely to occur again over sustained periods.
The outlooks for the housing and mortgage markets where covered bonds rated by Fitch are issued are broadly Stable or Positive due to better macro -economic conditions, low interest rates and, for some markets, improvements in affordability.