A Prudent Market Value Concept used under Ireland’s covered bond law has substantially mitigated the negative impact of the worst falls in residential house prices in Europe, according to Moody’s, as issuers have added further collateral to cover pools.

“As seen over the crisis to date, the Irish PMVC remains one of the most effective mitigants against falling house prices found in any covered bond law across Europe,” said Volker Gulde, vice president and senior credit officer at Moody’s, in a report on Tuesday. “Its effectiveness lies in the PMVC requirement for regular indexed LTV updates, regardless of the degree to which house prices might change.”

He said that the PMVC has provided support in two ways.

“Firstly, the direct result of the PMVC is that issuers compensate their covered bond investors by adding further collateral to cover pools,” said Gulde. “The addition of further collateral ensures that covered bonds are backed by collateral that has an indexed loan-to-value (LTV) threshold of 75%.

“Secondly, an indirect result of the PMVC is that the additional collateral provides covered bond investors with the benefit of substantial amounts of ineligible over-collateralisation (OC), i.e., OC that exceeds the 75% threshold.”

He said that had no mitigants been in place, the collapse in Irish property values – with house prices having fallen by more than 50% since their 2007 peak – would have substantially reduced the value of Irish cover pools.

“However, as house prices have fallen, issuers have added substantial amounts of additional collateral under the PMVC, which has protected investors against the fall in house prices,” said Gulde.