Moody’s highlighted what it considers to be strengths and weaknesses of Spain’s covered bond framework in a report published yesterday (Tuesday), with high overcollateralisation among positives cited and the lack of a requirement for periodic property revaluations among negatives.

The credit assessment of Spain’s legal framework for covered bonds is the fourth such report, in which Moody’s compares the merits of legal features to what it considers to be a typical covered bond legal framework, deeming each feature strong, average or weak. These Moody’s Legal Views (MLVs) can then be adjusted by a Market Practice Modifier (MP) to reflect contractual and non-contractual practices common in a jurisdiction.

Highlighting the relative strengths of the Spanish framework, Moody’s said that overcollateralisation (OC) levels for Spanish programmes are well above the typical legal minimum.

“For mortgage covered bonds, the law requires effective minimum OC of 25% on a nominal basis,” it said. “Taking into account non-eligible loans in the cover pool, OC based on the whole cover pool is usually much larger.

“For public sector covered bonds, the law requires effective minimum OC of 42.9% on a nominal basis.”

The rating agency also said the framework offers good protection against certain legal risks.

“There is a low risk of set-off or claw-back against cover pool assets after issuer default,” said Moody’s. “The inclusion of all loans on issuers’ balance sheets removes any risks associated with asset segregation.”

However, Moody’s again highlighted that there are no requirements for property valuations to be periodically reviewed, updated, indexed or stress tested.

“Hence a decline in property value that might push a loan over the LTV threshold for eligibility may not be recognised or recorded.”

(See here for a previous warning from Moody’s on this topic.)

As it did for valuation requirements, Moody’s assigned MLVs of “weak” with no mitigating MP in two other fields.

“There is no independent cover pool monitor to carry out regular checks of the cover pool,” it said. However the regulator does have the right to initiate an inspection of the cover pool register.

“For public sector covered bonds, the law does not provide any specific provision for the insolvency administrator to enter into financing agreements with third parties after issuer default, thus this may not be possible.”

Other features that were assigned MLVs of “weak” by Moody’s were able to reach “average” with the benefit of MPs.