Standard & Poor’s published a preliminary review of Morocco’s draft covered bond law yesterday (Wednesday), saying that although the legislation is likely to be finalised by the end of the year, further clarifications are needed for it to be ready for investors and for covered bond programmes to be rated.

Bank Al-Maghrib

As previously reported by The Covered Bond Report, Morocco has recently ended a public consultation on draft covered bond legislation, and at least one Moroccan bank is looking to test the instrument as soon as possible. (Select Morocco from country dropdown menu for related coverage.)

S&P said that the law presents similarities to the German covered bond framework, with covered bonds clearly defined as dual recourse instruments. It foresees that universal banks can issue mortgage and public sector covered bonds, and that cover pools are monitored by an independent trustee. However, the rating agency said that the law needs further clarification before it is ready for investors.

“Whether Moroccan covered bonds will become an as accepted funding product as in the European markets and can provide similar benefits to investors is as yet unclear,” it said.

“There are important details still to be finalised via additional circulars that we understand will be published later this year,” said the rating agency.

Clarifications are also needed for the rating agency to complete its assessment of the framework beyond the “initial analytical reading” that prompted S&P’s comment. Topics on which the rating agency will welcome more clarity are how the covered bond legislation will interact with the existing general banking and insurance law and whether and how additional measures to protect bondholders will be included.

S&P said that despite the law providing some clarity on the segregation of assets, further clarity is needed on how the provision on asset isolation would interact with Morocco’s general banking and insolvency provisions.

“More specifically, we would look to clarify how potential liquidity arrangements taken out to facilitate the contractual payment obligations would rank versus the covered bonds,” it said. “We further would want to understand to what extent set-off risk is addressed with regard to the cover assets, since the issuers are likely to be deposit-taking institutions.”
The rating agency also said details would be needed to assess whether payment moratoria, debt rescheduling, or other forced restructuring could be imposed on covered bondholders under the general banking and insolvency law.

Another aspect to be clarified, said the rating agency, is whether Morocco’s central bank, Bank al Maghrib (BAM) will impose limits on overcollateralisation above a 5% mandatory level, and if measures will be included to take into account possible asset deterioration and its impact on OC levels.

Also unclear are possible restrictions on the powers of the cover pool manager, which the law provides to be appointed by BAM after an issuer default.

S&P also said that it could not see any provisions that would allow for the inclusion of derivatives or other hedging arrangements, and thus cannot further elaborate on how they would rank after the insolvency of the issuer.
Despite highlighting these missing elements, in its preliminary assessment of the Moroccan covered bond proposal S&P noted the effort made by Moroccan officials, saying that “Moroccan authorities are striving to reduce the burden for investors of learning a brand new legal framework”.

Domestic investors seems to be the initial target of covered bond issuance, said the rating agency, but this could be beneficial for the development of a covered bond market in the long run.

“Establishing a domestic covered bond market first, building up a track record before targeting the international capital markets could in our view facilitate sustainable growth in the long term and should not be seen as an impediment to the development of Morocco’s covered bond market,” said the rating agency.

S&P noted that Morocco will be the first African country to introduce covered bonds. It highlighted some of the country’s specificities that could be supportive for the development of a covered bond market.

For example, the rating agency said that Morocco has displayed strong and stable growth over the past decade and that the country’s banking system is one of the largest and most concentrated in North Africa.

“The Moroccan mortgage finance system has seen a constant progression, from the liberalisation of the banking sector in the 1990s, through the consolidation of market supervision, to more recently the convergence of the local capital market with international and European standards,” added S&P, but also noting that it is still predominantly a deposit-funded system.