Fitch Ratings: Comfortable OC Cushion for Covered Bonds through the Coronavirus Crisis

(The following statement was released by the rating agency) Related Fitch Ratings Content: Covered Bonds Protection Dashboard (Excel) (https://www.fitchratings.com/site/re/10148255) Fitch Ratings-Paris/London-04 January 2021: High levels of overcollateralisation (OC) are available to protect covered bonds ratings and OC cushions have been stable since the beginning of the coronavirus crisis, Fitch Ratings says. The OC relied upon in our analysis is above 2x the level sufficient for the rating for around 60% of Fitch-rated covered bonds. In addition, around 80% of rated covered bonds benefit from buffers against a downgrade of the issuer's rating. The average buffer has remained constant since the beginning of the pandemic in March 2020. The OC cushion was at least 25% for 78% of rated programmes at end-December 2020, compared to 81% at end-March 2020. It is calculated as the difference between the OC that Fitch relies upon for a given programme and the breakeven OC for the rating of the programme, expressed as a percentage of the breakeven OC for the rating. Fitch does not generally give credit to the entire OC available in a programme. Fitch's relied-upon OC corresponds to either the lowest nominal OC between the total cover pool and outstanding covered bonds in the last 12 months, a legal or contractual commitment, or a public statement. At end-December 2020, only four out of 103 covered bonds programmes had a rating constrained by the level of OC. Fitch gives credit to a level of OC for these programmes (three Greek and one Danish) that is not sufficient to achieve the maximum covered bond rating, either 'AAA' or the applicable Fitch Country Ceiling, or else as determined by the number of notches of uplift above the issuer rating granted to the programme. Unused notches of buffers above issuer ratings are the other main source of protection for covered bonds ratings. At end-December 2020, the buffer against issuer downgrade was 3.4 notches on average, unchanged compared to the average at end-March 2020. This is likely to erode in the medium to long term as 77 covered bonds issuer ratings have a Negative Outlook. Rating Outlooks indicate the likely direction of a rating over the next one to two years. The buffer against an issuer downgrade and OC cushion are the two main shields preserving covered bond ratings from the effect of the pandemic. Their current levels are disclosed on an aggregated and on a programme-by-programme basis in the "Covered Bonds Protection Dashboard", which can be accessed via the link above. This Excel file also keeps track of changes in covered bond and issuer ratings since March 2020 and the share of ratings on Rating Watch Negative or Negative Outlook. 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