DBRS Publishes Updated Rating European Covered Bonds Methodology

DBRS Ratings Limited (DBRS) has today published its updated “Rating European Covered Bonds” methodology (the Methodology).

The Methodology update follows the conclusion of the Request for Comment period on 7 March 2016. DBRS did not receive any comment to the proposed Methodology.

The Methodology, effective today, supersedes the previous “Rating European Covered Bonds” published in December 2015. The updates to the Methodology constitute a material change to the previous version.

DBRS refines its analysis for deriving the Covered Bonds Attachment Point (CBAP) of all European Covered Bonds (CB) programmes that have a Reference Entity (RE) that is subject to the Bank Recovery and Resolution Directive (BRRD), enacted on 15 May 2014. The updated method involves the use of the RE’s Critical Obligations Rating (COR) alongside the current senior unsecured rating (RE-SUR) as a reference rating for the CBAP and the possibility of notching the rating of CBs down by up to one notch from the COR, or up by up to two notches above RE-SUR in certain circumstances.

The level of notching will depend on DBRS’s assessment of the following main factors: (1) whether there is a COR assigned for an RE or not; (2) when a COR is not assigned but the RE is subject to a BRRD-equivalent regime, then the systemic importance of the RE; (3) the importance of the CB as an instrument for the economic and financial system of the relevant country; and (4) the importance of the CB programme as a funding instrument for the core business of the RE.

The CBAP is one of the building blocks of the Methodology and represents the likelihood that the RE will keep meeting timely payments on the CB before the source of payment switches to the Cover Pool. The COR addresses the risk of default of particular obligations/exposures that have a higher probability of being excluded from bail-in and remaining in a continuing bank vis-à-vis the senior unsecured obligations of a bank in the event of its resolution. The COR is generally two notches above the bank’s Intrinsic Assessment (IA). This notching may widen at the point of the resolution of the bank, as the SUR/IA of the bank is likely to transition further down because of the higher risk of bail-in. Nevertheless, it is less likely that the COR will remain higher than the SUR in the case of a systemic banking crisis.

DBRS expects the updates to the Methodology will have a positive effect on the rating of the CBs issued under 11 CB programmes, which could be subject to un upgrade of up two notches, and a negative effect on the rating of the CBs issued under two CB programmes, which could be subject to a downgrade of up to two notches.

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

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