Independent Credit View, a Swiss credit research boutique, has developed a covered bond rating model to cater for demand from its institutional investor clients for an independent credit risk assessment of their holdings as a complement to rating agencies’ views, an I-CV spokesperson told The CBR.

René Hermann

The ratings will not be made public because I-CV has for the last 10 years strictly operated an investor-pay model, said René Hermann, partner at I-CV, which is based on full insight into and continuous monitoring of its clients’ positions and “does not lend itself to conflicts of interest”.

Demand from large German pension funds for an independent assessment of the covered bonds in their portfolios was the main driver for I-CV to extend its services to the asset class, he told The Covered Bond Report.

He said that I-CV is not seeking to compete with the established rating agencies, a question that is often asked, and that its services are designed as a complementary source of unbiased information and expert analysis on top of that provided by incumbent rating agencies.

“Our consultancy services have gained interest since the crisis, in particular because we were able to detect early the deteriorating credit quality of certain banks and sovereigns and position our clients well ahead of the curve,” he said. “We were approached by one of the largest pension funds in Germany and asked if we could expand our offering to cover their covered bond holdings.”

The rating model was launched this month and is initially available for five jurisdictions – France, Germany, Norway, Spain, and Sweden – although as of the end of June Independent Credit View (I-CV) will extend this to Austria, Ireland, Italy, the Netherlands, Switzerland, and the UK. From the end of September the company envisages further expanding its rating universe, also to include non-European jurisdictions.

There are three pillars to I-CV’s rating model, which takes as its point of departure the credit quality of the issuer, as assessed under the firm’s bank model. Next comes an analysis of the cover pool, including elements such as the loan-to-value ratio (LTV), overcollateralisation levels, and asset-liability mismatching. In a third step, I-CV’s rating model looks at four market categories. A property indicator is designed to capture the possible overheating of property markets, while a legal framework factor takes into account the strength of legal provisions, for example about cover pool eligibility criteria. These two aspects are weighted 35% and 30%, with I-CV’s country ratings contributing 25% of the assessment. The covered bond tradition in a given country is weighted 10%.