Austrian covered bonds issued under the country’s Mortgage Bank Act can be backed by loan parts exceeding a 60% LTV ratio, Moody’s said yesterday (Monday) following a recent legal analysis, describing this as a “particularly material benefit” in Austria.

There are three covered bond laws in Austria, and the Mortgage Bank Act (Hypothekenbankgesetz) is the first to which Moody’s analysis, supported by external legal advice, has concluded that the rating agency may give benefit to loan parts exceeding a 60% loan-to-value (LTV) ratio, according to Martin Lenhard, vice president, senior analyst at Moody’s.

“The law is old and in the past it was not entirely clear whether loan parts above 60% could be included,” he told The Covered Bond Report. “Issuers tended to follow a conservative interpretation of the law but our legal analysis determined that the entire loan can be included in the cover pool.

“The 60% LTV limit is an issuance limit rather than an eligibility criterion.”

Loan parts exceeding the 60% threshold are eligible and available to covered bondholders if the full loan amount is recorded in the cover pool register.

The other two covered bond laws in Austria are the Covered Bond Act and the Pfandbrief Act and Moody’s does not currently consider loan parts in excess of the 60% LTV ratio threshold for programmes set up under these laws.

The rating agency noted that in absence of a statutory provision, some issuers have added this tightening of the eligibility criteria by amending their articles of association or included the 60% LTV ratio threshold in the terms and conditions of the covered bonds.

However, if under the Covered Bond Act and Pfandbrief Act issuers were to register loan parts beyond the 60% LTV ratio threshold in the cover pool and report them to Moody’s, the rating agency could take these parts into account in its analysis, according to Lenhard.

“However, this would be contingent on us obtaining legal clarification that these parts are available to covered bondholders on a priority basis under these two frameworks,” he said.

Erste Group Bank and UniCredit Bank Austria issue under the Hypothekenbankgesetz; Austrian Landes mortgage banks (such as HYPO NOE Gruppe Bank) issue under the Pfandbrief Act; and Bawag, Kommunalkredit, the Raiffeisen banks and Österreichische Volksbanken issue under the Covered Bond Act (Gestez betreffend fundierte Bankschuldverschreibungen).

The cover pool eligibility of loan parts exceeding 60% LTV under the Mortgage Bank Act is credit positive, according to Moody’s, because registration of the full loan amount increases the amount of assets available for the covered bondholders’ benefit.

“When issuers register the full loan amount of loans with LTV ratios above 60% in the cover pool, this is a material credit benefit as it increases overcollateralisation (OC) levels given that the issuer may only issue bonds against the first 60% LTV,” said Lenhard.

“The benefit provided by loan parts beyond the LTV ratio threshold is a particularly material benefit in Austria,” he added, “given the low 60% LTV ratio threshold in Austria compared with the typical 75% or 80% LTV ratios in most other jurisdictions.”

The benefit of higher OC is partially offset by the lower quality of OC comprised of high LTV loan parts, said Moody’s. However, the risk of lower quality assets only relates to the OC, because the Mortgage Bank Act limits covered bond issuance to an amount equal to the first 60% LTV of each loan in the cover pool.