Moody’s gives verdict on Finland’s covered framework

Mar 14th, 2013

Moody’s published a credit assessment of Finland’s legal framework for covered bonds on Tuesday, highlighting several strengths of the country’s market, but citing weaknesses with respect to cover pool monitors and to covered bondholders’ rights over certain overcollateralisation.

The report highlights what are considered to be the jurisdiction’s strengths and weaknesses relative to a “typical” framework.

Regarding Finland’s covered bond legislation, Moody’s said that a strength is that only up to 10% of assets can be commercial property-backed loans, and that another is the prohibition of set-off and claw-back risk against cover pool assets.

Other strengths cited by Moody’s include non-performing assets not being taken into account for the calculation in cover pool tests of the total amount of cover pool assets, and issuers testing interest coverage on an ongoing basis.

It also highlighted as positive the appointment at issuer default of a cover pool supervisor with wide powers to manage the cover pool, and direct the issuer’s administrator, for the benefit of covered bondholders.

However, Moody’s said that a weakness of Finland’s framework is that the law does not provide for an independent cover pool monitor to make regular checks on the cover pool and covered bond programme. It nevertheless noted that issuers report quarterly to the Finnish FSA.

The rating agency also said that covered bondholders do not have priority rights to OC in excess of the legal minimum if such OC exceeds LTV thresholds for mortgage-backed assets at the time of issuer default, and said that this is a weakness of the framework and has implications for investors when evaluating voluntary or committed OC levels.

In its legal assessments, Moody’s also comments in its legal framework assessments on common practices in jurisdictions that may prevail even if they are not included in a country’s law, giving a view on what it calls Market Practice Modifiers (MPs).

In Finland’s case, it highlighted that although provisions in the law for liquidity to address refinancing risk are average, a number of covered bonds have 12 month extension periods for principal repayment, supporting an MP of “strong”.

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