The European Central Bank recently tightened the eligibility criteria for using covered bonds as collateral for funding.
This move could hurt the credit quality of covered bond programs, according to Moody’s Investors Service.
The new criterion does not allow covered bonds with ABS assets in their pools to be used as collateral for ECB funding. “In our view, the change in repo eligibility is credit negative because it will reduce the purchase prices of cover pools containing ABS assets, should the pools need to be sold,” said Moody’s Senior Analyst Martin Rast.
The agency said the more stringent rule could also prompt issuers to restructure their programs in order to shed the assets that are ineligible for ECB funding.
Nevertheless, Moody’s only rates five covered covered bond programs that have ABS assets. All are from France. Public sector securitizations make up about 11% of a deal from Dexia Municipal Agency. The other five French covered bonds all have RMBS in their collateral, ranging between 8% to 100% of each pool.