News on Covered Bonds: Negative Outlook On Covered Bonds To Continue

Negative Outlook On Covered Bonds To Continue

October 22, 2013

Negative outlooks on covered bond ratings have not seen any change over the past quarter but there has been an increase in the number of covered bond issuers with negative outlooks. Mortgage covered bonds of Greek banks received negative outlook from Fitch.[1] Portugese covered bonds programmes also received negative outlook from Fitch.[2] S& P lowered its outlook on Danish banks causing outlook of its covered bonds to fall.[3] Although a downgrade or any change in the outlook by a rating agency on an issuer of covered bonds does not automatically cause a downgrade in the rating of the covered bond issue, there is still a high correlation between the issuer’s ratings and the covered bonds ratings. Thus, unless the negative ratings on the banks show a reversal of trend, covered bonds may continue to get affected. In addition, there are interest rate risks and country risks which are preventing the outlook on covered bonds from improving in the short run. Covered bonds are also exposed to market value risk. If there are unmatched cash flows, it might cause an asset sale. Although there are enough cushions by way of overcollateralization, which has slightly increased by 2% in the last quarter, some issuers have reportedly shown high degree of fluctuations in overcollateralization. In Sweden, overcollateralization provided by covered bond issuers increased by 10.4% whereas in Portugal it decreased by 6.3%. [4] Issuers must continue to manage these fluctuations to maintain a stable rating.

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Reported by: Shambo Dey