DBRS Publishes Updated Rating European Covered Bonds Methodology and Market Value Spread Assumptions

DBRS Ratings Limited (DBRS) has today published its updated Rating European Covered Bonds Methodology (the Methodology) along with an addendum containing the midpoints of the assumed Market Value Spreads Range.

The Methodology update follows the conclusion of the Request for Comment (RFC) period on October, 27, 2014. DBRS did not receive any comments to the proposed methodology; hence, the final published Methodology is substantially the same as the version distributed for the RFC. The market value spread assumptions are being published under a separate addendum to the Methodology.

The Methodology is effective today and supersedes the previous “Rating European Covered Bonds” methodology published on 30 January 2014. The updates to the Methodology constitute a material change to the previous version. In the Methodology, DBRS refines its analysis by incorporating credit for high recovery prospects provided by the cover pool in its ratings and by making its Legal and Structuring Framework (LSF) assessment more granular with the addition of a fifth category (Average) to the existing four categories. Moreover, DBRS explains how the timeliness of accessing the cover pool cash flows and the expectation of support affect the LSF assessment.

In the Methodology, DBRS explains its cash flow modelling in more detail, making reference to sources other than secondary market residential mortgage-backed security spreads in the determination of market value spreads applied in the analysis and differentiating by type and quality of assets in the cover pool.

DBRS specifies how much credit it gives to overcollateralisation in a Covered Bonds (CB) programme and where the application of DBRS counterparty criteria may differ from DBRS’s “Legal Criteria for European Structured Finance Transactions” and “Derivative Criteria for European Structured Finance Transactions” (both of which are available on DBRS’s website).

Finally, DBRS introduces the concept of a Covered Bonds Attachment Point representing the likelihood that the Reference Entity (RE) meets timely payments due on the CBs. This concept, however, still refers to the issuer rating of the RE.

At the same time, DBRS has today republished its review of the LSF for the four jurisdictions where it rates CBs (Ireland, Italy, Portugal and Spain) and, in separate commentaries, has assigned an individual LSF assessment to each CB programme it rates.

The net impact of the updates to the Methodology is positive on the CBs issued under 13 programmes out of the 19 that DBRS rates. For certain ratings, the impact of the Methodology cannot be currently assessed due to the Issuer or RE ratings’ being Under Review with Negative or Developing Implications. There are no ratings negatively affected by the Methodology. The impact of the Methodology on the CB ratings is summarized in the PDF file linked to this press release. Please refer to the press release issued in connection with each specific CB programme for a detailed rationale of each rating.

Notes:
DBRS criteria and methodologies are publicly available at www.dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.