Moody’s cites Norwegian BRRD covered benefits

The expected implementation in Norway of a resolution regime equivalent to the EU Bank Recovery & Resolution Directive (BRRD) will result in Norwegian covered bonds having less exposure to bank defaults and losses, Moody’s said last Friday (14 August), highlighting the rating benefits this has led to.

“Norway is not a member of the EU, so Norwegian covered bonds do not fall directly under the EU’s Bank Recovery & Resolution Directive,” said Moody’s. “However, we expect that an equivalent resolution regime will be put in place and we incorporate this expectation in our covered bond analysis.”

Moody’s has updated its methodology to introduce Counterparty Risk (CR) assessments, which it uses – instead of senior unsecured debt ratings – as a measure to determine the probability of default of certain types of obligations if a bank enters resolution. These CR assessments have been incorporated into Moody’s covered bond rating methodology as the new reference points for covered bond anchor points, which covered bond ratings are notched up from.

The rating agency said on Friday that it has now assigned CR assessments to issuers of Norwegian covered bonds and that the result has been the upgrading of one programme, that of SpareBank 1 Naeringskreditt from Aa1 to Aaa. Most Norwegian covered bonds are rated triple-A by Moody’s, explaining why more upgrades have not followed the implementation of the updated methodology.

However, the rating agency noted that for those programmes that have not been upgraded, higher covered bond anchors mean that they need less overcollateralisation (OC) to reach their current ratings, with the required OC having dropped from 7.63% to 3.00% on average.

Ratings volatility has also been reduced, added Moody’s, since the number of notches an issuer’s rating can fall before triggering a downgrade under the rating agency’s Timely Payment Indicator methodology (the TPI leeway) has fallen relative to the corresponding measure before the update. DNB Boligkreditt’s mortgage covered bond programme now enjoys six notches of TPI leeway versus three notches previously, for example.

“With the new CR assessment, there will likely be far fewer instances in which rating downgrades of stronger issuers lead to negative rating actions on covered bonds,” said Moody’s.