Standard & Poor's has updated its criteria for assessing counterparty risk in covered bond programs, which could affect up to 50% of outstanding ratings on covered bonds.

The criteria will be effective as of July 12, at which time all the ratings likely to be lowered will be placed on CreditWatch negative.

The updated criteria incorporate refinements based on feedback from market participants. The changes are mainly directed at the assessment of derivatives in covered bond programs, the rating agency said. It also clarifies the assessment of bank account risk in covered bond programs. It will apply to existing and new ratings on covered bonds for the assessment of counterparty risk.

When these criteria are applied, the covered bond rating is linked both to the issuer credit rating (ICR) on the issuer and the ICR on the counterparty when assessing counterparty risk in covered bonds.

S&P said that the level of rating changes will depend on the combinations of counterparty obligations in covered bond programs and any actions covered bond issuers may take, including modifications to documents or risk mitigation.

"We expect to update the ratings on all covered bonds, at the latest, on or before the transition date," analysts said in a press statement today.

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