Higher OC after Fitch amends counterparty criteria
Fitch expects its Covered Bonds Counterparty Criteria, which includes new amendments, “will have an immediate effect on a limited number of covered bond ratings”. Most programmes, and especially those that use internal counterparties, will only be affected if the issuer's rating deteriorates by several notches, Fitch said when it released the criteria on Monday.
It expects issuers will be able and willing to improve the liquidity protection against potential missed interest payments shortly after bank default, notably in programmes with an extended maturity for principal payments.
However, if this risk remained insufficiently mitigated, affected programmes' ratings would be tied more closely to the applicable Issuer Default Rating (IDR) and this may automatically result in downgrading the covered bonds' ratings from their current level.
Fitch will review affected programmes' covered bond ratings over the next six months and will discuss with issuers whether they plan to make modifications. With the threat of rating action, concrete mitigants should be proposed by issuers within four weeks of Fitch’s request
Their obvious choice will be to increase overcollateralisation though this is likely to vary substantially from case to case depending on the margins on assets, liabilities and derivatives, type of derivative, maturity of assets and liabilities, current interest and FX rates.
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