Norwegian challenges possible on covered limit, says Moody’s

Oct 25th, 2012

Any shift to more unsecured funding prompted by possible restrictions on covered bond issuance by the Norwegian FSA could prove challenging, Moody’s cautioned on Monday, although it said such a move could benefit senior bondholders.

Finanstilsynet (the Financial Supervisory Authority of Norway) last week surprised market participants by raising the prospect of restrictions being placed on covered bond issuance and of higher capital charges for the heaviest issuers. The regulator cited risks to issuers’ funding profiles and the impact of asset encumbrance on unsecured creditors.

Moody’s on Monday said that any regulations restricting covered bond issuance by Norwegian banks could be beneficial for unsecured bondholders and depositors.

“More limited covered bond issuance would be credit positive for unsecured creditors because it would limit the amount of good quality loans pledged as covered bond collateral, thereby improving the amount and quality of assets available to unsecured bondholders and depositors in a liquidation,” said Moody’s analyst Soline Poulain.

However, while noting that Norwegian issuers have generally been successful in accessing capital markets on an unsecured basis, she sounded a note of caution over the implications of the regulator’s thinking.

“The availability and cost of unsecured funding can be more volatile, particularly at times of market stress,” said Poulain. “Depending on banks’ ability to readily access unsecured funding at appropriate costs, we believe that a shift to more unsecured funding may prove challenging, partly offsetting the benefits of senior bondholders’ improved subordination position.”

Moody’s said that the country’s largest banking groups have transferred the highest proportions of loans to covered bond issuing vehicles, meaning that the biggest banks would see the biggest shifts in their funding structures should any cap be introduced by the regulator.

Stein Sjølie, director, Finance Norway (FNO), said that the regulator’s announcement came after the Ministry of Finance wrote to Finanstilsynet in June asking it to review Norway’s covered bond framework given the strong growth in the market since its inception in 2007.

He told Nordic FIs & Covered that while FNO and its members told the government they are happy with the way the market has developed and that the regulations might only require a couple of minor technical clarifications, the regulator’s move came as a surprise.

Sjølie said that any changes to regulation along the lines of Finanstilsynet’s comments last week would take time to be finalised and implemented. (See full interview on page 3.)

In the meantime, a change to regulation that is being considered is to the way mortgages on second homes are treated in the Norwegian covered bond framework, according to Sjølie.

To date, these have been included alongside residential mortgages on first homes. However, he said that with the regulator considering that LTVs on second homes should have the same limit as for commercial mortgages, 60%, rather than the 75% limit on residential mortgages, they could also be reclassified as commercial mortgages.

“I don’t find that logical given that they are still homes,” said Sjølie.

He said that any such regulation could affect institutions with second home mortgages in their cover pools because issuers have generally chosen to restrict their programmes to either residential or commercial collateral, and not a mix of the two.

However, a funding official at an issuer who had not yet heard of the development said that it would have little impact given the low proportion of such mortgages in the issuer’s cover pool.

Sjølie said that a consultation on the proposal is underway and any regulation could be in place by year-end.

Photo: Stian Lysberg Solum/SCANPIX; Copyright PA Photos

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