Denmark, Sweden top tier in DBRS covered update

Denmark and Sweden are among six countries where in DBRS’s view covered bonds are a particularly important funding instrument, meaning that issuers from the countries can be eligible for the highest possible uplift from their senior unsecured rating under an updated methodology the rating agency finalised last week.

DRBS published the updated EU covered bond methodology on Tuesday of last week (8 September) after a request for comment (RFC) period launched in May, and it now allows for Covered Bond Attachment Points (CBAPs) to be up to two notches higher than the senior unsecured rating of the reference entity rather than being the same.

Upon releasing the RFC in May, DBRS said that the proposed changes would have a neutral to positive effect on the European covered bonds it rates, although Vito Natale, head of covered bonds at DBRS, noted yesterday (Thursday) that the rating agency’s financial institutions analysts are reviewing how sovereign support is reflected in bank ratings and that the net impact of the two changes is expected to be neutral for most covered bonds.

DBRS has now listed those jurisdictions where it deems covered bonds to be a particularly important funding instrument – one of two key considerations affecting the extent to which CBAPs can be notched up from reference entity senior unsecured ratings (the other being whether the issuer is considered systemically important, which is determined by the rating agency’s financial institutions group rather than its covered bond team).

The countries where covered bonds are a particularly important funding instrument, under DBRS’s analysis are: Denmark, Germany, Ireland, France, Spain and Sweden. The rating agency highlighted that Denmark is among the largest covered bond-issuing jurisdictions.

“Covered bonds amount to 1.4 times the country’s GDP as of the end of 2014, and given the very moderate presence of the sovereign funding in the financial market, covered bonds are perceived domestically as a substitute for sovereign debt,” it said. “Outstanding covered bonds are also a very high proportion of the outstanding long-term debt securities of the monetary and financial institutions.

“Moreover, the old-style pass-through principle that most of the issuers abide by may mean that a market dislocation could have serious impacts on housing finance in the country.”

DBRS noted that Swedish covered bonds represent a considerable proportion of the country’s GDP and that outstanding mortgage covered bonds as a percentage of house purchases are high.

“Both of these ratios point to the high level of interconnectedness to the real economy,” it said. “The ratio of covered bonds to total bank liabilities underlines the significance of covered bonds as a funding instrument for the financial sector.”