Proposed Monetary Authority of Singapore covered bond rules would protect investors in the areas of cover pool quality, overcollateralisation, and ongoing risk monitoring, but fall short with respect to cover pool segregation and operations and servicing details, Moody’s said today (Wednesday).

The Monetary Authority of Singapore on 9 March launched a consultation on proposals for covered bond issuance by banks incorporated in Singapore. The deadline for comment is 10 April. No covered bonds have previously been issued from Singapore.

Moody’s said that restrictions on cover pool assets would be credit positive because the proposals only allow residential mortgage loans and derivatives held for the purpose of hedging risks arising from covered bond issuance. Residential mortgage loans have proven to be the best performing assets on bank balance sheets, noted the rating agency.

It also noted that covered bond investors would stand to benefit from improved cover pool value, because the contributions of mortgage loans with loan-to-value ratios (LTV) above 80%,would, for the purposes of calculating the value of cover pools, be limited to 80% of the property value.

In addition, the cover pool value would improve, according to Moody’s, because the liquidation proceeds of a mortgage loan with LTV above 80% would be allocated to the covered pool as if it were an 80% LTV loan. This approach would be analogous to an overcollateralisation, said Moody’s.

Other credit positive features are a minimum 3% overcollateralisation requirement and a requirement on the issuer to put in place adequate risk management processes and internal controls to manage the risks arising from a covered bond issuance.

“The appointment of a cover pool monitor would provide an additional layer of checks and balances, mitigating operational and fraud risks, as well as offering additional protection to investors,” added Moody’s.

On the downside, the rating agency said that unless the proposed rules are enacted as law, the separation of the cover pool from the bankruptcy estate of the defaulted issuer would still rely on the prevailing legal regime.

“Compliance with the proposed rules would not automatically ensure that the covered pool would be separated from the bankruptcy estate of the banks,” said Moody’s. “If the issuing bank was in bankruptcy, other creditors could still challenge the validity of the segregation.”

The rating agency also said that the proposed rules do not set out details on operational and servicing aspects of covered bond issuance, and these would need to be clarified by transaction parties, for example in contractual agreements.