Rate investors are likely going to get a much smaller piece of the triple-A pie for covered bond investments.

This phenominon is happening as European issuers continue to take a beating from the sovereign debt crisis.

Moody's Investors Service this week announced several programs that it placed under review for a possible downgrade. These add to the already mounting ratings review that the agency together with Standard & Poor's and Fitch Ratings have initiated in the covered bond universe.

According to a report published by Bank of America Merrill Lynch today, this means that most of the European covered bond markets are no longer triple-A. "Rates investors have access to a smaller investment universe, especially as their rating guidelines have not adapted to the new rating levels," analysts said in the report.

BofA Merrill added that the situation could lead to ratings shopping on behalf of issuers looking to secure the higher rating.

"The linkage between issuer and covered ratings varies across rating agencies," explained analysts in the report.  "An alternative whenever possible might be to post additional over-collateralization.

However, analysts also said that such credit enhancement can backfire and result in various rating downgrades. This has happened in the securitization market when rating agencies changed their modeling assumptions as has been seen previously, BofA Merrill analysts noted. 

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