The Impact of COVID-19 on European Covered Bonds – Two Years On...

The recovery of many European economies is well underway following the easing of restrictions imposed during the Coronavirus Disease (COVID-19) pandemic. This commentary outlines how the pandemic affected covered bond (CB) ratings in terms of the credit quality of the issuer, the cover pool, and the host sovereign.

Key highlights include:
-- Since the onset of the pandemic in March 2020, DBRS Morningstar only downgraded its rating on one CB issuer, leading to a downgrade of that issuer’s CBs;
-- In many CB programmes, 90+-day arrear levels increased in 2020, but decreased below pre-pandemic levels since. The overcollateralisation (OC) levels in European CB programmes are adequate to withstand further stress; and
-- DBRS Morningstar only downgraded one sovereign rating for a European jurisdictions in which DBRS Morningstar-rated CBs are established since March 2020. This had no impact on the CB ratings.

“The greatest potential for pressure on CB ratings comes from the credit quality of the issuer. However, given limited rating actions on issuers so far and OC potentially compensating for a lower Covered Bonds Attachment Point through a higher Cover Pool Credit Assessment, we expect the impact from the pandemic on CB ratings to remain limited”, stated Roger Bickert, Vice President of European RMBS and Covered Bonds at DBRS Morningstar.