Credit ratings for covered bonds are facing the prospect of ratings changes, both upgrades and downgrades, now that Fitch Ratings has updated its rating criteria.
Fitch published the updated rating criteria on Wednesday, following a market consultation that began in June. As a result, 23 covered bond programs could be upgraded, six could be downgraded, and 93 likely will not be affected, the rating agency says in a report. The new criteria will be applied over the next six months.
The potential downgrades could be avoided, Fitch notes, if the overcollateralization (OC) that it relies upon in its analysis is increased to a level that supports the current rating.
“Given the dynamic nature of covered bond programs, Fitch will conduct a dialogue with issuers where the level of OC provided to covered bondholders can affect the rating decision,” the Fitch report says.
Conversely, possible upgrades would mainly be in programs issued from countries rated low-investment-grade, such as Italy, Spain and Ireland, and from speculative-grade countries Portugal and Greece. Upgrades are also possible among U.K. and Norwegian programs not rated ‘AAA’, the report says.