In a statement, Moody’s Investor Service's said that the proposed legislation for a U.S. covered bond law does not address the liquidation risk that exists in the current U.S. covered bond programs or contain any alternatives.
The existing draft for a U.S. covered bond law is called the Equal Treatment of Covered Bonds Act of 2009, which is intended to place covered bonds on an equal footing with other qualified papers under the Federal Deposit Insurance Corp. (FDIC). The proposal has now reached the U.S. House of Representatives.
According to Moody’s, while the draft offers significant improvements for U.S. covered bonds, there is still a high or increased probability of a pool liquidation scenario within the next 120 days in the event of an issuer becoming bankrupt, as provided under the program rules for currently outstanding U.S. covered bonds.
The agency believes that other alternatives open to the FDIC, such as the transfer of the covered bonds to a still performing bank, or the making of a compensation payment in the amount of the outstanding par value of the covered bonds, have become even less likely.
The draft legislation does not present any alternatives to the liquidation risk, which is an important factor for the agency in determining the rating for the bonds.
According Dresdner Kleinwort analysts, many European programs provide for the appointment of a pool administrator, who continues to manage the pool. In the U.S. case, though, it depends on the contractually defined documentation of the programs.
“Credit quality concerns are still dominating the performance of U.S. covered bonds,” Dresdner analsyts said. “Spreads of Canadian covered bonds for example, which likewise are not included in the [European Central Bank] purchase program, have partly significantly tightened in, but spread levels with U.S. covered bonds have stayed much wider though.”
