Moody’s yesterday (Tuesday) launched a new series of reports on covered bond jurisdictions that, using a set format, will rank legal features to facilitate comparability. An analyst at the rating agency said that the initiative represents an extension of its efforts to provide transparency.

The report series, which was kicked off by publication of an analysis of Norway’s legal framework, will involve the rating agency ranking legal features according to Moody’s Legal Views (MLVs) as Strong, Average, or Weak, with the benchmark being what Moody’s referred to as a “typical” covered bond legal framework. This basis for comparisons is intended to make the reports highly comparable across the analysed jurisdictions, according to Moody’s.

Jane Soldera, Moody’s

Jane Soldera, vice president and senior credit officer in Moody’s covered bonds group, told The Covered Bond Report that the new series of reports is intended to serve as a resource and represents the rating agency’s desire to expand into legal analysis the transparency that it has been providing since 2008 via performance overviews and publication of collateral metrics.

“It’s a case of sharing information and providing a scoring system that enables a quick overview that you wouldn’t get without categorising,” she said. “As we publish more reports they will become more and more valuable as a means of comparing different frameworks.”

The launch of these new reports comes at a time when regulators and industry groups are pushing for greater comparability and transparency in the covered bond market, and Soldera said that while Moody’s move is “in the same spirit” as these initiatives, it is separate and reflects a long-standing ambition of the rating agency.

The ranking system at the heart of the reports does not represent a change to Moody’s approach to rating covered bonds, she added.

“It has been a cornerstone of our analysis to look at legal frameworks,” she said. “We already take into account the features that will be covered by the reports, with some of them for example likely to have informed aspects of our methodology like the Timely Payment Indicator (TPI).

“But the rankings are not supposed to be read as feeding through one to one into ratings,” she added.

The reports will rank legal features relative to what Moody’s referred to as a “typical” covered bond legal framework, with this benchmark, according to Soldera, capturing the features most commonly found in covered bond legal frameworks and that Moody’s considers as representing an “average standard”.

“It’s not an opinion on what is a perfect framework,” she said. “We are trying to highlight where features go above and beyond the average and where they fall short.

“As we publish more and more reports a more detailed picture will build of what we consider to be typical.”

Designation of the credit quality of a particular feature as Average means that this given feature falls into the category of what Moody’s considers to be typical, she said.

The rankings can refer strictly to the covered bond law or also take into account the impact of general law. In addition to assigning a MLV to a particular legal feature, Moody’s can, where material, add a Market Practice Modifier (MP) to the MLV ranking if market practice, contractual and otherwise, renders the particular feature more or less significant, thereby providing a composite evaluation.

The report on Norway’s legal framework, which The CBR understands will serve as the template for further reports, provides a summary opinion identifying its “outstanding” features before summarising the main strengths and weaknesses of the framework and then summarising the legal framework together with the rankings. A section looking at the legal framework in detail, including more commentary on the background to Moody’s evaluations, follows. In the Norwegian report, Moody’s separates out 48 different features that are assigned a rank.

Soldera said that the rating agency aims to publish reports on the legal framework in other countries before the end of the year.

“Norway was first because we thought the legal framework there would be a good template,” she said. “We felt that a legal framework with too many non-standard features would not make sense as a template.”

Stein Sjølie, senior advisor at Finance Norway (FNO), which provides the secretariat for the Norwegian Covered Bond Council, said that at a quick glance Moody’s report gives the impression of being a thorough and well elaborated document.

Examples of Norway’s strengths and weaknesses, as described by Moody’s in its summary, include:

Relative Strengths – CB law

Non-performing assets are excluded from cover pool tests, and therefore cannot dilute pool quality. However, they may remain in the cover pool and be included in OC calculations. Assets typically become non-performing at 90 days past due.

Relative Strengths – Contractual

Most issuers (though not all) provide for a contractual 12 month maturity extension on the covered bonds at the issuer’s discretion. This provides additional liquidity for principal payments.

Relative Weaknesses – CB law

The CB law does not provide for any minimum OC level. However, issuers may agree to hold a certain minimum amount of OC.