2. Ratings
New rating methodologies
Over the last 12-15 months, the major rating agencies have introduced new rating methodologies for covered
bonds and have started adjusting their covered bond ratings in light of the new bank resolution regimes. Given
the link between issuer ratings and covered bond ratings, the net effect of the introduction of the bail-in rules
will have either a positive or a negative impact on the covered bond ratings depending on the individual issuer.
On the one hand, covered bonds are explicitly exempted from bail-in and the recent changes of the rating
methodologies by the agencies reflect the preferential treatment of covered bonds under the new resolution
regimes. This positive effect could, on the other hand, be (more than) offset by issuer downgrades.
Over the past months, there have been numerous rating changes for covered bonds as well as for covered bond
issuers. While in many cases the covered bond ratings were adjusted before the implementation of a new bank
rating methodology, covered bond ratings had to undergo two rating impacts. So far, the overall rating impact for
covered bonds was predominantly positive and in any event, the rating differential between both asset classes
widened significantly. This further improves the rating advantage covered bonds have vs senior unsecured debt.
We view it as crucial that the starting point of the covered bond ratings is not the senior unsecured rating as
the bailing-in of senior unsecured debt no longer automatically triggers an issuer default. The newly introduced
resolution measures principally aim at maintaining a going-concern entity. The fact that covered bonds are ex -
empted from bail-in measures means that a different starting point for the covered bond rating has to be used.
2. RatingsNew rating methodologiesOver the last 12-15 months, the major rating agencies have introduced new rating methodologies for covered bonds and have started adjusting their covered bond ratings in light of the new bank resolution regimes. Given the link between issuer ratings and covered bond ratings, the net effect of the introduction of the bail-in rules will have either a positive or a negative impact on the covered bond ratings depending on the individual issuer. On the one hand, covered bonds are explicitly exempted from bail-in and the recent changes of the rating methodologies by the agencies reflect the preferential treatment of covered bonds under the new resolution regimes. This positive effect could, on the other hand, be (more than) offset by issuer downgrades.Over the past months, there have been numerous rating changes for covered bonds as well as for covered bond issuers. While in many cases the covered bond ratings were adjusted before the implementation of a new bank rating methodology, covered bond ratings had to undergo two rating impacts. So far, the overall rating impact for covered bonds was predominantly positive and in any event, the rating differential between both asset classes widened significantly. This further improves the rating advantage covered bonds have vs senior unsecured debt.We view it as crucial that the starting point of the covered bond ratings is not the senior unsecured rating as the bailing-in of senior unsecured debt no longer automatically triggers an issuer default. The newly introduced resolution measures principally aim at maintaining a going-concern entity. The fact that covered bonds are ex -empted from bail-in measures means that a different starting point for the covered bond rating has to be used.
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