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Global Covered Bonds: Assessing The Credit Effects Of COVID-19

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Global Covered Bonds: Assessing The Credit Effects Of COVID-19

The coronavirus outbreak has led to governments across the world restricting personal mobility and shutting down large parts of their economies. While such measures remain in place, they could affect some borrowers' ability to service their debt in the short term, and a number of countries have announced plans for mortgage borrower relief, including Italy, Spain, the U.K., Belgium, Denmark, and Sweden (see "Credit FAQ: Will Mortgage Payment Suspensions Related To COVID-19 Affect European RMBS?," published on March 13, 2020).

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could hurt employment levels and housing markets (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Does the introduction of mortgage payment forbearance affect covered bond ratings?

Last week, regulators in various European countries stated that they consider borrowers' loss of income due to COVID-19 as special grounds, allowing banks and borrowers to agree a reduction or suspension of loan payments for a limited period of time, with missed payments not necessarily classifying as arrears. European banks have already announced initiatives to assist customers by offering mortgage borrowers installment-free periods, the possibility of overdrafts, and reduced payment installments.

Investors in covered bonds have dual recourse to the financial institution behind the covered bond program (the covered bond issuer) and to the assets in the cover pool. We believe that a short-term reduction in collections due to forbearance on mortgage installments will therefore have limited impact on our covered bond ratings. We expect issuers to have access to sufficient balance sheet liquidity--especially given increased central bank support--to offset such lower collections. We consider the possibility of a general deterioration in economic conditions more likely to affect other analytical pillars of our covered bond ratings--in particular, potential changes to sovereign, counterparty, or issuer credit ratings (ICRs).

What if ICRs deteriorate?

Due to the dual-recourse nature of covered bonds, their ratings are typically linked to the relevant rating on the covered bond issuer, i.e., the issuer credit rating (ICR). Any impact on the ICR caused by COVID-19--including potential outlook revisions, CreditWatch updates, or downgrades--may therefore directly affect the ratings on covered bond transactions that do not have so-called "unused notches of uplift" available under our criteria (see definition in the Appendix). Currently, most issuers in most countries have unused notches available, which may be utilized should the ICR deteriorate (see chart 1 and detailed overview in the Appendix). Programs without unused notches are spread across jurisdictions, and are mainly a result of relatively low ICRs or limits to the jurisdictional or collateral support elements of our ratings analysis.

The unused notches are also reflected in the stable outlooks on most covered bond programs that we rate (see chart 2). A negative change to ICRs and issuer outlooks will directly affect the current ratings on covered bonds without unused notches.

Chart 1

image

Chart 2

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What if sovereign credit ratings deteriorate?

Our covered bond framework considers the potential disruption that would occur if a sovereign defaults. We may assign a covered bond rating that's higher than the sovereign rating on the jurisdiction where the underlying assets are domiciled, but only if we are comfortable that the covered bond could withstand a sovereign default without itself defaulting.

Sovereign defaults are typically accompanied by a severe economic scenario, including deposit withdrawal restrictions, forbearance measures, emergency taxation, and currency redenomination. The credit risk of assets securing covered bonds have different levels of dependency on the sovereign's performance. We consider underlying assets such as mortgage loans to have low to moderate sensitivity, and transactions backed by such assets can be rated up to six notches above the sovereign rating. By contrast, transactions backed by public sector assets are limited to a rating that is two notches above the sovereign's. In some cases, the dependency leads us to (weak) link the ratings on the covered bonds to that on the sovereign. The sovereign rating may also affect the level of uplift available based on jurisdictional support, which is capped at the issuer country rating in line with the our covered bonds criteria.

Given our current sovereign ratings, covered bond ratings in most jurisdictions would not change due to a one-notch downgrade of the sovereign, with some exceptions (see table 1, which highlights the difference in sensitivity to the sovereign rating between mortgage- and public sector-backed covered bonds). We would expect mortgage programs in Ireland, Greece, Italy, and Spain, as well as programs backed by public sector assets in Belgium, France, and the U.K., to be most sensitive to changes in the respective sovereign ratings.

Table 1

Sensitivity Of Covered Bond Ratings To Sovereign Downgrade
Country Current sovereign rating Highest covered bond rating achievable* Highest covered bond rating achievable if sovereign were downgraded by one notch§
Austria AA+ AAA AAA
Belgium mortgage AA AAA AAA
Belgium public sector AA AAA AA+
Denmark AAA AAA AAA
France mortgage AA AAA AAA
France public sector AA AAA AA+
Finland AA+ AAA AAA
Germany AAA AAA AAA
Ireland AA- AAA AAA
Greece BB- BBB+ BBB
Italy BBB AA- A+
Norway AAA AAA AAA
Spain A AA+ AA
Sweden AAA AAA AAA
The Netherlands AAA AAA AAA
U.K. mortgage AA AAA AAA
U.K. public sector AA AAA AA+
*Under our Ratings Above The Sovereign (RAS) criteria. §Our view is dependent on the nature of the assets and the transaction's mitigation of refinance risk.

Appendix

What is the number of unused notches in covered bond programs?

We sometimes refer to a covered bond rating's "unused notches of uplift", which are the number of notches the ICR can be lowered by, without resulting in a downgrade of the covered bonds, all else being equal. It is the sum of unused notches of jurisdictional support and unused collateral-based uplift. Our criteria determine that a covered bond rating may be a number of rating notches higher than the ICR, due to a combination of jurisdictional support and protection provided by the underlying collateral. In combination, these effects may provide an uplift from the ICR of a number of rating notches. However, several covered bond programs warrant more notches of uplift on this basis than is required to reach a (highest possible) rating of 'AAA'. For example, a program that has four notches of uplift and where the issuer is rated 'AA' would reach a 'AAA' rating using only two of the available notches of uplift, leaving two unused notches. By extension, such a program could withstand up to a two-notch downgrade of its issuer's credit rating without suffering a downgrade to the program's own 'AAA' rating, all else being equal.

Table 2

Global Covered Bond Characteristics And Rating Summary*
Issuer/CB program Asset type Country of issuer Unused notches of uplift§ Rating and outlook
Anadi Bank Covered Bond Program Mortgage Austria N/A AA/--/--
KA Finanz FBS - Fundierte Bankschuldverschreibungen Public Austria 0 AA+/Stable/--
Kommunalkredit Austria Public Sector Covered Bonds Public Austria 0 A/Stable/--
Oberbank AG Mortgage Covered Bond Program (Hypothekarisch fundierte Bankschuldverschreibungen) Mortgage Austria 2 AAA/Stable/--
Oberösterreichische Landesbank AG Mortgage Covered Bond Program Mortgage Austria 0 AA+/Stable/--
Oesterreichische Kontrollbank AG Public Sector Covered Bonds Public Austria 0 AA+/Stable/--
Bausparkasse Wüstenrot AG Mortgage Covered Bond Program Mortgage Austria W/H AAA/Stable/--
Belfius Bank SA/NV Mortgage Belgium 1 AAA/Stable/--
Belfius Bank SA/NV Public Belgium 2 AAA/Stable/--
BNP Paribas Fortis Mortgage Pandbrieven Mortgage Belgium 3 AAA/Stable/--
Deutsche Apotheker- und Aerztebank eG Mortgage Germany 5 AAA/Stable/--
DZ BANK AG Deutsche Zentral-Genossenschaftsbank Public Germany 3 AA+/Stable/A-1+
DZ HYP AG Mortgage Sector Covered Bond Program Mortgage Germany 5 AAA/Stable/A-1+
DZ HYP AG Public Sector Covered Bond Program Public Germany 5 AAA/Stable/--
NRW.BANK Public Germany 2 AAA/Stable/--
Wuestenrot Bausparkasse AG Mortgage Germany 2 AAA/Stable/--
Jyske Realkredit A/S- Capital Center B Mortgage Denmark 3 AAA/Stable/A-1+
Jyske Realkredit A/S - Capital Center E Mortgage Denmark 3 AAA/Stable/A-1+
Jyske Realkredit A/S - General Capital Center Mortgage Denmark 3 AAA/Stable/A-1+
Danmarks Skibskredit Ship Denmark 0 A/Stable/--
Danmarks Skibskredit A Ship Denmark 0 A/Stable/--
Danske Bank A/S - Pool C Mortgage Denmark 1 AAA/Stable/--
Danske Bank A/S - Pool D Mortgage Denmark 3 AAA/Stable/--
Danske Bank A/S - Pool I Mortgage Denmark 1 AAA/Stable/--
DLR Kredit A/S - Capital Center B Mortgage Denmark 2 AAA/Stable/--
DLR Kredit A/S - General Capital Center Mortgage Denmark 2 AAA/Stable/--
Nordea Kredit Realkredit A/S - Capital Center 1 Mortgage Denmark 5 AAA/Stable/A-1+
Nordea Kredit Realkredit A/S - Capital Center 2 Mortgage Denmark 5 AAA/Stable/A-1+
Nykredit Realkredit A/S - Capital Center C Mortgage Denmark 4 AAA/Stable/--
Nykredit Realkredit A/S - Capital Center D Mortgage Denmark 4 AAA/Stable/--
Nykredit Realkredit A/S - Capital Center E Mortgage Denmark 4 AAA/Stable/--
Nykredit Realkredit A/S - Capital Center G Mortgage Denmark 4 AAA/Stable/--
Nykredit Realkredit A/S - Capital Center General Mortgage Denmark 4 AAA/Stable/--
Nykredit Realkredit A/S - Capital Center H Mortgage Denmark 4 AAA/Stable/--
Nykredit Realkredit A/S - Capital Center I Mortgage Denmark 4 AAA/Stable/--
Realkredit Danmark A/S - Capital Center S Mortgage Denmark 3 AAA/Stable/A-1+
Realkredit Danmark A/S - Capital Center T Mortgage Denmark 3 AAA/Stable/A-1+
Realkredit Danmark A/S - General Capital Center Mortgage Denmark 3 AAA/Stable/--
Totalkredit A/S - Capital Center C Mortgage Denmark 4 AAA/Stable/--
Abanca Corporacion Bancaria SA Mortgage Spain 0 AA+/Stable/--
Banco Bilbao Vizcaya Argentaria S.A. Mortgage Spain 0 AA+/Negative/--
Bankia S.A. Mortgage Spain 2 AA/Stable/--
Bankinter S.A. Mortgage Spain 3 AA+/Stable/--
CaixaBank S.A. Mortgage Spain 3 AA/Stable/--
Cajamar Caja Rural, S.C.C. Mortgage Spain W/H AA/Stable/--
Ibercaja Banco S.A. Mortgage Spain 0 AA/Stable/--
Kutxabank S.A. Mortgage Spain 2 AA+/Stable/--
Bank of Aland PLC - Category FIN Covered Bonds Mortgage Finland 1 AAA/Stable/--
Bank of Aland PLC - Category SWE Covered Bonds Mortgage Finland 1 AAA/Stable/--
OMA Savings Bank Mortgage Finland 0 AAA/Stable/--
OP Mortgage Bank (second program 2011) Mortgage Finland 5 AAA/Stable/--
Sp Mortgage Bank plc Mortgage Finland 3 AAA/Stable/--
The Mortgage Society of Finland Mortgage Finland 1 AAA/Stable/--
AXA Home Loan SFH Mortgage France 5 AAA/Stable/--
BNP Paribas Home Loan SFH Mortgage France 5 AAA/Stable/--
BPCE SFH Mortgage France 5 AAA/Stable/--
Caisse Francaise de Financement Local Public France 0 AA+/Stable/--
Compagnie de Financement Foncier Mixed France 4 AAA/Stable/A-1+
Credit Agricole Home Loan SFH Covered Bond Program Mortgage France 5 AAA/Stable/--
Credit Agricole Public Sector SCF Public France 5 AAA/Stable/--
Credit Mutuel Home Loan SFH Mortgage France 4 AAA/Stable/--
GE SCF S.C.A Public France W/H AA/Stable/--
HSBC SFH (France) Mortgage France 6 AAA/Stable/--
La Banque Postale Home Loan SFH Mortgage France 4 AAA/Stable/--
MMB SCF Covered Bond Program Mortgage France 0 AAA/Stable/--
Societe Generale SCF Public France 4 AAA/Stable/A-1+
Eurobank Covered Bond Programme I Mortgage Greece N/A BBB+/--/--
Eurobank Covered Bond Programme III Mortgage Greece N/A BBB+/--/--
National Bank Of Greece CB2 Mortgage Mortgage Greece N/A BBB+/--/--
National Bank Of Greece CB1 Mortgage Mortgage Greece N/A BBB+/--/--
Takarek Mortgage Bank Co. PLC Mortgage Covered Bond Program Mortgage Hungary 1 BBB/Positive/--
AIB Mortgage Bank Mortgage Ireland 2 AAA/Stable/--
UniCredit SpA Obbligazioni Bancarie Garantite Programme Mortgage Italy 1 AA-/Negative/--
Korea Housing Finance Corp. Social Covered Bonds Mortgage South Korea 0 AAA/Stable/--
AEGON Bank N.V. Covered Bond Programme Mortgage The Netherlands N/A AAA/--/--
Van Lanschot N.V. Covered Bond Programme Mortgage The Netherlands N/A AAA/--/--
ING Bank N.V. Mortgage The Netherlands 5 AAA/Stable/--
ING Bank N.V. Soft Bullet Covered Bond Programme Mortgage The Netherlands 5 AAA/Stable/--
NN Bank N.V. Covered Bond Programme Mortgage The Netherlands N/A AAA/--/--
NIBC Bank N.V. Covered Bond Programme Mortgage The Netherlands N/A AAA/--/--
DNB Boligkreditt AS Mortgage Norway 4 AAA/Stable/--
Eiendomskreditt AS Mortgage Norway 1 AAA/Stable/--
Nordea Direct AS Mortgage Norway 3 AAA/Stable/--
Storebrand Boligkreditt AS Mortgage Norway 2 AAA/Stable/--
Danske Hypotek Mortgage Sweden 4 AAA/Stable/--
Landshypotek Bank AB Mortgage Sweden 2 AAA/Stable/A-1+
Lansforsakringar Hypotek Mortgage Sweden 2 AAA/Stable/A-1+
Nordea Hypotek AB Mortgage Sweden 4 AAA/Stable/--
Sparbank Skane Mortgage Sweden 1 AAA/Stable/--
Swedbank Mortgage AB Mortgage Sweden 4 AAA/Stable/A-1+
United Overseas Bank Ltd. Global Covered Bond Programme Mortgage Singapore 0 AAA/Stable/--
Bank of Scotland PLC Covered Bond Programme Mortgage U.K. 2 AAA/Stable/--
Bank of Scotland PLC Social Housing Covered Bond Programme Public U.K. 2 AAA/Negative/--
Barclays Bank PLC Global Covered Bond Programme Mortgage U.K. 1 AAA/Stable/--
Nationwide Building Society Global Covered Bond Programme Mortgage U.K. 1 AAA/Stable/--
Santander UK PLC Global Covered Bond Programme Mortgage U.K. 1 AAA/Stable/--
*As per our criteria "Covered Bonds Criteria," published Dec. 9, 2014. §Unused notches equal the unused notches for jurisdictional support plus the unused collateral-based uplift. N/A--Not applicable. W/H--Withheld at the issuer's request.

Related Criteria

  • Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
  • Covered Bond Ratings Framework: Methodology And Assumptions, June 30, 2015
  • Covered Bonds Criteria, Dec. 9, 2014

Related Research

  • European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020
  • Coronavirus Impact: Key Takeaways From Our Articles, March 27, 2020
  • COVID-19: The Steepening Cost To The Eurozone And U.K. Economies, March 26, 2020
  • European Corporate Securitizations: Assessing The Credit Effects Of COVID-19, March 26, 2020
  • European CLOs: Assessing The Credit Effects Of COVID-19, March 25, 2020
  • European CMBS: Assessing The Credit Effects Of COVID-19, March 24, 2020
  • COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
  • COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
  • Will Mortgage Payment Suspensions Related To COVID-19 Affect European RMBS?, March 13, 2020
  • Global Covered Bond Insights Q4 2019, Dec. 12, 2019
  • Glossary Of Covered Bond Terms, April 27, 2018

This report does not constitute a rating action.

Primary Credit Analyst:Casper R Andersen, Frankfurt (44) 20-7176-6757;
casper.andersen@spglobal.com
Secondary Contact:Barbara Florian, Milan (39) 02-72111-265;
barbara.florian@spglobal.com

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