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Greek Covered Bond Commitments Are Stronger than EU Directive

Greece’s implementation of the EU Covered Bond Directive will bolster the country’s legal framework for covered bond issuance by making liquidity protection mandatory, Fitch Ratings says. In practice, Fitch-rated programmes already address key risks through contractual arrangements or public commitments which are typically more stringent that those in the Directive, notably in relation to liquidity and overcollateralisation (OC).

The new framework will apply to covered bonds issued from 8 July 2022 – the target date for EU member states to apply the Directive. Under transitional arrangements, its key provisions will not apply to outstanding bonds issued before this date. Tap issuances issued before 8 July 2024 will also be grandfathered if they mature before 8 July 2027 and meet certain other conditions.

Fitch does not expect any rating impact from the Directive implementation as we see little incentive for issuers to weaken contractual provisions, and because grandfathering provisions cover existing Fitch-rated instruments.

The new framework requires that a liquidity reserve cover 180 days of net liquidity outflows on the covered bonds. The reference maturity for extendible covered bonds is the extended final maturity. However, both issuers currently have liquidity reserves covering at least six months of senior fees and interest payments on the covered bonds and an extension of principal repayments of 12 months or longer. This supports the maximum Payment Continuity Uplift (PCU) of six notches for Alpha’s soft bullet programme, and eight notches for Piraeus Bank’s (Piraeus) conditional pass-through programme.

Our Greek covered bond ratings (‘BBB-’ for both programmes) are constrained by the issuers’ OC commitments. The new framework stipulates a minimum OC of 5%, which may be increased through secondary legislation by the Bank of Greece (secondary legislation is expected next month). Both Alpha and Piraeus commit to OC substantially above 5% (27% and 25%, respectively). These levels limit the ratings due to high maturity mismatches between assets and liabilities (for Alpha) and the high credit loss limiting the cash flows to support timely payments on the covered bonds (for Piraeus) should the issuer fail to pay.

The definition of liquid cover assets is in line with the Directive, but it may be restricted when the Bank of Greece publishes its secondary legislation. The minimum credit quality is Step 3 (CQS3) for bank deposits, equivalent to Fitch’s ‘BBB’ rating category under EU regulations. A CQS3 counterparty can support different maximum achievable covered bond ratings, depending on its notch-specific rating and its role in the programme. A short-term deposit exposure to a CQS3 counterparty acting as an account bank would support the current ‘BBB-’ ratings of the Alpha and Piraeus programmes, and is compatible with the ‘BBB+’ maximum achievable rating of Greek covered bonds under our Country Ceiling.
Source: Fitch Ratings

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