OREANDA-NEWS. Fitch Ratings says the credit risk of cover pools securing its rated covered bonds, as measured by the agency's 'B' Portfolio Loss Rates (PLR), has decreased marginally. The median 'B' PLR was 0.8% as of end-August 2015, down from 1.1% at end-October 2014 when data was first collected.

In particular, the PLR for cover pools at the high end of the loss rate range has reduced over the period, such as in Ireland (-1.8%), Cyprus (1.4%) or Greece (-1.2%). The changes were driven by increased seasoning, which lowers current loan-to-value (LTV) of mortgage loans. However, 'B' PLRs for cover pools originated in the eurozone peripheral countries remain substantially higher than for other European pools (8x in 2015 versus 6x in 2014).

As in Fitch's previous study, public sector cover pools ('B' PLR of 1.2%) are on average lower-risk than mortgage programmes (2.4%). Nevertheless, some individual commercial real estate pools exhibit lower 'B' PLR than residential mortgage or public sector cover pools, due to material differences in assumed recovery rates. Lower LTV eligibility criteria for commercial real estate loans of 60% (vs. 80% for residential loans) can lead to recovery rates near 100% in a 'B' stress scenario. By contrast, in a 'B' stress scenario, we apply a 40% recovery assumption for defaulted sovereign debt forming part of public sector cover pools.

Fitch 'B' PLRs allow comparison of the credit quality of cover pools regardless of the rating of their respective covered bonds. The 'B' PLR represents the weighted average (WA) stressed loss rate, in a 'B' rating scenario, applicable to a given cover pool over its lifetime. It is calculated as the product of the WA 'B' default rate for the cover pool by 1 minus the WA 'B' recovery rate for defaulted loans.

The special report builds upon data for 118 covered bonds programmes publicly rated by Fitch across 20 countries worldwide. Programmes not inclued have no available 'B' PLR because no detailed asset analysis has been conducted, such as for bonds rated on the basis of a guarantee or have a limited uplift above the Issuer Default Rating. Individual 'B' PLRs are updated upon the periodic review of Fitch cover pool credit risk analysis, and disclosed on the agency's covered bonds surveillance pages and in its quarterly covered bonds surveillance snapshot.