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Announcement:

Moody's increases refinancing margins for European covered bonds

08 Apr 2009

Limited negative rating actions expected

London, 08 April 2009 -- Moody's Investors Service said today that it has increased the spread it uses to model refinancing risk for European covered bonds. This increase was primarily driven by the continuing re-pricing of risk, which has resulted in rising spreads on a wide range of fixed income products, including covered bonds. Moody's does not expect a large number of rating downgrades to result from this change.

This action is not a change in the rating methodology for covered bonds, but an adjustment to Moody's current assumptions, which is necessary to ensure that refinancing margins continue to be assessed in accordance with its published covered bonds methodology.

Moody's expects that the increase to the refinancing margins will affect 58 programmes that are not already on review for downgrade, which comprises 35% of the programmes it rates. For 50 of these transactions to maintain their current ratings, the implementation of the new refinancing margins may be mitigated, on average, by the addition of under 5% of collateral. Based on the previous willingness of the issuers' to support their programmes and the magnitude of the additional collateral to maintain the ratings of the covered bonds, Moody's does not expect negative rating actions for the majority of these programmes. However, Moody's notes that for the remaining eight affected programmes, the increase in the level of collateral to maintain the current ratings is expected to exceed 10%. If no further enhancements are added to the affected transactions, the rating impact for the vast majority of these transactions would be a one notch downgrade. In no case is the rating downgrade expected to exceed two notches.

When assessing the refinancing margins used in Moody's rating approach, the primary reference points used are: i) for mortgage-backed covered bonds, covered bond trading indices; and ii) for public sector-backed covered bonds, trading levels for public sector debt. Moody's also considered a number of further reference points for this exercise, particularly where information on covered bond trading indices and public sector debt levels was more limited. These include individual trading prices for covered bonds, government CDS premiums, and RMBS spread levels. Furthermore, Moody's also made jurisdiction and deal-specific adjustments to try and ensure a consistent rank ordering of jurisdictions, and also to take into account deal-specific issues that may not be reflected in data that relies on indices. In most cases the refinancing margins established by Moody's are in excess of the current stresses observed in the covered bond and public sector markets.

Moody's expects to disseminate a press release indicating the number of ratings affected by this change within the next forty five days.

Following this change, the average refinancing margins used in Moody's rating approach across some of the major covered bond markets are around:

- For mortgage-backed covered bonds: France 200bps; Germany 190bps; Netherlands 250bps; Norway 180bps, Portugal 330bps; Spain 370bps; Sweden 210bps; and UK 350bps.

- For public-sector backed covered bonds: Austria 250bps; France 110bps; Germany 90bps; and Spain 200bps.

Refinancing margins are one of the three main determinants of refinancing risk -- the others being the portion of a cover pool impacted by refinancing risk and the average life of the assets in the cover pool. A measure of the refinancing risk can be found in our performance overviews under the heading "Refinancing and Market Risks".

The vast majority of covered bonds are exposed to refinancing risk. Refinancing risk arises following the default of the bank supporting the covered bond ("Issuer Default"). Following an Issuer Default, the covered bond must be repaid from the assets backing the covered bond. For "bullet bonds", the natural amortisation of the assets cannot be relied on to repay the bonds. This means that funds need to be raised against the assets backing the covered bond, possibly through the firesale of the assets. The discount on the price achieved to complete this sale, in the potentially stressed environment following the default of the bank that originated these assets, is referred to as refinancing risk. Some markets do not suffer material refinancing risks. For example, in Denmark, the majority of covered bonds are pass-through bonds, which means that following the default of a bank supporting a covered bond, the covered bonds should be able to rely on the natural amortisation of the assets to pay them back. Pass-through covered bonds have not been impacted by this review.

As the credit crisis evolves, Moody's will continue to review refinancing margins and update them as appropriate.

Madrid
Juan Pablo Soriano
Managing Director
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Nicholas Lindstrom
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's increases refinancing margins for European covered bonds
No Related Data.
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