Norway, Sweden top Moody’s cover pool eligibility rankings

Norway came top out of six countries in a Moody’s ranking of how strong different jurisdictions are with respect to eligibility criteria for cover pool assets based on a combination of covered bond law and market practice, while Sweden was first taking into account only the covered bond law.

The rating agency also ranked countries according to cover pool management before issuer default, with Germany coming top, while Spain was last in both areas under consideration.

Moody’s released its verdicts on Monday in a comparison of legal frameworks taking in Germany, Finland, France, Norway, Spain and Sweden. The rating agency noted that while it is drawing attention to the strengths and weaknesses of each country, the features cited are only some of those it considers when determining ratings.

To determine the ranking, Moody’s assigned a score of 1 to 4 — to reflect weak to strong — to various features of each of the two areas under consideration. It then summed these to arrive at an overall score for each area — and did so for each country both based on the covered bond law alone and based on a combination of the covered bond and market practice (MP). It did not weight the features according to their importance for overall credit quality, it noted, adding that those countries that show strengths in a broad range of features tend to be stronger in key features as well.

Norway achieved the highest score for eligibility criteria based on covered bond law and market practice, with Finland and Sweden coming equal second. Based on covered bond law alone, Sweden was top.

Norway’s leading score was attributed to the strength of Norwegian cover pool swaps under both law and practice.

“Under the law, there is a positive requirement that if a swap counterparty’s credit quality falls then adequate security must be provided to mitigate the increased risk,” said Jane Soldera, senior credit officer at Moody’s. “Market practice for Norwegian issuers is typically to use external (i.e., non-intra-group) swaps to maximise the chance of the cover pool swap surviving issuer default.”

The rating agency highlighted among other strong features in the Nordics a 10% limit on commercial property loans in Sweden and Finland, and a 5% obligor concentration limit in Norway. It also noted that Sweden requires that asset coverage from mortgage loans be stressed against house price falls of up to 30%.

Moody’s cited three factors contributing to Spain’s last place: lack of revaluation of mortgaged properties; the difficulties of using swaps for hedging purposes; and relatively high and unrestricted levels of commercial property loans.

Germany came top in cover pool management before issuer default based both on covered bond law alone and also on the combined measure, with Moody’s saying the country’s legal framework stands out for robust practices in almost all the aspects of cover pool management it looked at. The rating agency cited several factors contributing to Germany’s position: strong independent oversight from the cover pool monitor (Treuhander); continuing oversight from two dedicated departments at the regulator; a continuous net present value (NPV) test incorporating material interest rate and currency-risk stresses; and a 180 day liquidity reserve for interest and principal payments on covered bonds.

Spain again came last in the ranking, with Moody’s citing an absence of liquidity tests for the cover pool and lack of a cover pool monitor as some of its weaknesses. However, the rating agency noted that changes to Spain’s legal framework are being considered.

Moody’s said that further reports on other topics will follow, and that it expects to add further countries to such reports.