Finland takes silver in Moody’s post-default framework ranking

Finland came second to Germany in a ranking by Moody’s of eight covered bond jurisdictions according to how they deal with the consequences of an issuer default, with Norway and Sweden being placed mid-table.

The verdicts came on Tuesday in a second report from Moody’s ranking jurisdictions according to their strengths and weaknesses, after one focusing on eligibility criteria for cover pool assets and on cover pool management before issuer default in December 2014 – then, Germany came out top for cover pool management and Norway top for eligibility criteria.

The new report took in Canada, Finland, France, Germany, Italy, Norway, Spain and Sweden, and Moody’s covered four areas: issuer default – general, which looked at what happens at the point of issuer default; cover pool asset and cashflow segregation and priority rights; management of the cover pool; and refinancing the covered bonds.

The ranking is based on scores assigned to various elements considered by Moody’s in its analysis depending on whether they are weak, strong or average, and the rating agency also gives rankings based on covered bond law alone and also covered bond law plus market practice.

Moody’s said that Germany dominates the overall rankings, with the country coming first in three out of four of the categories under analysis based on law plus practice – although it came last in cover pool asset and cashflow segregation and priority rights.

“The German covered bond law is particularly strong on covered bond refinancing after issuer default, i.e. creating liquidity from the cover pool to repay maturing bonds,” added Moody’s.

Finland was second strongest and ranked equal-first with Germany on cover pool management after issuer default.

“Strong features were the requirement for a cover pool supervisor with significant powers and responsibilities, and a compulsory reserve for interest payments,” said Moody’s.

Norway and Sweden appeared towards the middle or low end of most of the rankings. Regarding the management of cover pools post-issuer default, only Spain was ranked below them.

“In Sweden and Norway, no particular weaknesses were identified, but these (plus Spain) were the only frameworks that did not have quantifiable requirements for an interest reserve after issuer default, although other protections, such as external swaps in Norway and strong de facto matching of interest payments in Sweden, mitigate this risk,” Moody’s said.

Moody’s noted that the two countries’ use of specialist institutions for covered bond issuance could be an advantage when it comes to surviving the default of their parent, but added that this could also limit the value of bondholders unsecured claim against issuers given that specialist issuers typically have limited assets outside the cover pool.

Italy came first in the cover pool and cashflow segregation and priority rights category, ahead of Spain and Canada in equal-second place, based on law and practice. However, Italy came last in issuer default – general, while Spain was second-last and ranked last for refinancing as well as in management of the cover pool.