Moody’s: Swedish move positive

A Swedish government plan to introduce a legislative 2% minimum overcollateralisation level – prompted by EU derivatives clearing regulations – would be credit positive for covered bonds, according to Moody’s.

The requirement, proposed on Thursday of last week (24 September), would mean Sweden’s covered bonds will meet the criteria necessary for exemption from central clearing obligations for OTC derivatives under the European Market Infrastructure Regulation (EMIR).

Under EMIR, covered bonds are exempt from central clearing requirements if they meet criteria laid down by the European Securities & Markets Authority (ESMA), which include a requirement for a “legal” collateralisation level of 102%.

Moody’s said the proposed law is credit positive as it would allow Swedish issuers to continue using interest rate and currency swaps as a key risk-mitigation tool.

“Although covered bond issuers in many jurisdictions rely little on swaps, swap usage is standard in Sweden,” it said. “And, although some Swedish covered bond issuers may otherwise have benefitted from EMIR’s intra-group swap exemptions, ultimately a swap that cannot be transferred to a new counterparty – i.e., outside the issuer group and the intragroup exemption – when the issuer is under stress has less value for the cover pool.”

The proposal would also be credit positive for investors in Swedish covered bonds, Moody’s said, because it provides an absolute minimum buffer of cover pool assets that cannot be legally removed before or in the event of an issuer default.

Moody’s noted the proposal would require 2% OC on both a nominal and a net present value basis, meaning it strengthens both the par and present value coverage tests that the programmes must pass.

The increased coverage requirements would have to be met on a continuous basis, the rating agency said, while adding that actual OC levels in Swedish covered bonds it rates exceed 2% on a nominal basis, and should also be sufficient on a net present value basis. Swedish covered bonds also already meet all additional criteria to qualify for the exemption, according to the rating agency.

Moody’s said it expects other European jurisdictions that do not have legal minimum OC requirements for covered bonds, including Norway and Italy, to introduce the 2% requirement ahead of the EMIR clearing and margining requirements taking effect.