OREANDA-NEWS. Fitch Ratings intends to continue assigning Issuer Default Rating (IDR) uplifts to covered bonds programmes in jurisdictions where there is an advanced resolution framework in place, where fully collateralised covered bonds are exempt from bail-in, and where Fitch believes payments will continue being made without recourse to the cover pool. This is expressed in the "Exposure Draft: Covered Bond Ratings Criteria".

The new proposal to determine the IDR uplift places an emphasis on whether the risk of undercollateralisation at the point of an issuer resolution 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. To reach conclusions on this, Fitch has undertaken a review of legal frameworks and contractual documentation, minimum overcollateralisation (OC) requirements, the existence of dedicated supervision, the eligibility criteria for cover assets, and the existence of periodic mortgage assets valuation and of an asset monitor. Fitch's conclusions are included in "Fitch's Jurisdictional Analysis of the Risk of Undercollateralisation of Covered Bonds - Excel file", which can be accessed in the link at the end of this release.

Most programmes in jurisdictions where Fitch currently assigns an IDR uplift will be eligible to an IDR uplift under the new proposal. This applies to regulated covered bonds in Austria, Belgium, Cyprus, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Slovakia and the UK, as well as to contractual covered bonds in France and Switzerland. There are a few notable exceptions.

In Austria, mortgage fundierte Bankschuldverschreibungen are less well protected against this risk compared with European peers, as far as legislative maximum loan-to-value for the financed mortgage loans are lacking. In Germany, Fitch believes gedeckte Schuldverschreibungen are more at risk of undercollateralisation at the point of resolution than Pfandbriefe, if the cover pool largely consists in unsecured exposure to entities of the same group than the issuer. Structured covered bonds backed by loans to small - and medium-sized enterprises may not be eligible for an IDR uplift, despite minimum OC enforced through the programme Asset Coverage Test (ACT), as they are not regulated and subject to such close monitoring as Pfandbriefe.

In addition, it is possible Polish Listy Zastawne may no longer be eligible for an IDR uplift by Fitch if regulatory authorities exempt their issuers, similar to the Danish specialised mortgage credit institutions, from compliance with the minimum requirement for own funds and eligible liabilities. This is because covered bonds would then bear losses in a way that meets resolution objectives.

Covered bonds issued in jurisdictions that do not currently receive an IDR uplift are unlikely to be assigned one under Fitch's proposed methodology. This is either because there is no advanced bank resolution framework in place including a bail-in tool of which fully collateralised covered bonds are exempt, such as Australia, Chile, Norway, Singapore, or South Korea, or because Fitch believes there is a risk that the cover pool may be enforced at the point of resolution, such as New Zealand and the US. However, Fitch is considering granting an IDR uplift to non-regulated covered bonds in the UK and the Netherlands based on the fact that, as fully secured debt instruments, they are exempt from bail-in. They also enjoy similar protection regarding the risk of undercollateralisation than regulated covered bonds in the same country.