OREANDA-NEWS. Fitch Ratings says that liquidity provisions upon the switch from the issuer to the cover pool as the source of payments would make the most difference to the number of notches between the issuer rating and the covered bond rating assigned by the agency. Protection against cash flows mismatches is one of several issues addressed in the European Commission (EC) consultation on a harmonised covered bonds framework.

Also, not only the absolute level of legal minimum overcollateralisation (OC) but clarity on whether voluntary OC held above such a threshold would be considered remote from unsecured creditors, would be relevant to Fitch's analysis, as this is a grey area in some covered bond frameworks.

However, even under a harmonised regime or common guidelines in the EU, Fitch's Country Ceilings would still apply and differentiation in Fitch's covered bonds ratings will continue to be driven by the Issuer Default Rating, the credit quality of individual cover pools, the programme's asset and liability mismatches and macro-economic conditions prevailing in the country.

In its special report, titled "European Commission Covered Bonds Consultation: Single Framework Would Not Lead to Homogenous Ratings", Fitch addresses six issues of the EC consultation and how the potential implementation would impact Fitch's covered bond rating analysis: liquidity risk protection, minimum and maximum OC, aircraft, ship and SME loans, special administrator, asset segregation method and a harmonised reporting template.

The report is available on www.fitchratings.com.