OREANDA-NEWS. Fitch Ratings has updated its asset analysis criteria for covered bonds and CDOs of European public entities.

The criteria detail Fitch's asset analysis approach for rating covered bonds and CDOs backed by assets exposed to European central, local and regional governments (LRGs) and public sector entities (PSEs), collectively known as public entities. The new report replaces the version published on 16 February 2015. The agency does not expect any impact on its public sector covered bond or CDO ratings as a result.

Fitch analyses the default risk in the underlying public entity portfolios based on available public ratings, or, where not available, Fitch internal credit opinions or rating assumptions. In the criteria update, the meaning and use of rating assumptions is clarified. Furthermore, a new single obligor threshold of 2% is introduced above which rating assumptions cannot be used. Should individual credit opinions for such obligors be unobtainable, Fitch will assign a probability of default assumption equivalent to a 'CCC' rating to such exposures.

Besides the input assumptions for the obligor credit risk and the term of the exposures, the correlation assumption is the main parameter that determines the magnitude of the portfolio default rate and as a result the rating loss rate for each liability rating level. In the absence of meaningful data available regarding LRG defaults, the agency performed calibration exercise using migration-based conditional default rates relying on available public ratings of European LRGs to infer the expected volatility in default rates. The resulting correlation assumptions are slightly higher than the previous assumptions.

Finally, as an addition to the criteria, Fitch provides more detail on the assessment of export credit agency-guaranteed loans.

Fitch publicly rates 15 covered bond programmes, issued out of six countries, and two CDOs that include public entity assets.

The report is available at www.fitchratings.com.