Downgraded European sovereigns saw ratings on their covered bonds lowered at levels ten times higher than those from more stable European sovereigns, according to a Moody's Investors Service special comment published today.
Moody's based its rating migration study on the performance of European covered bonds outstanding as of January 1, 2008. The analysis is split between covered bond performance in countries that have experienced a sovereign downgrade during the crisis and sovereign ratings that have not been downgraded over this time period. The rating agency found that a divide persisits between the performance of covered bonds of stable sovereigns and downgraded sovereigns.
"The primary cause of the covered bond rating downgrades continues to be the downgrades of the banks supporting the covered bonds, with the impact of these downgrades being particularly severe in downgraded sovereigns," explained Juile Ng, a Moody's analyst and author of the report. "A reason for this is that the uplift a covered bond can achieve over and above its supporting bank is further restricted as the credit strength of the sovereign deteriorates."
The rating agency noted in its report that the average notch downgrade of covered bonds in downgraded sovereigns since the start of 2008 is now over seven notches. In stable sovereigns, that average is lower than one notch.