Amendments to the legislative framework for Dutch covered bonds proposed by the Netherlands’ Ministry of Finance would increase liquidity protection and provide a legal backstop for minimum OC, according to Fitch, while the removal of a rating floor would not have an adverse impact.

Dutch Ministry of Finance

The rating agency’s comments last Thursday follow a consultation process by the ministry, which closed on 11 April, to asses proposed changes, including the scrapping of a AA- rating limit for new issuance.

Fitch said that while the rating requirement has provided a minimum level of investor protection, with regard to liquidity and overcollateralisation (OC), it does not expect a removal of the requirement to lead to issuers lowering OC commitments to levels that would result in a downgrade.

“In practice, active issuers are likely to maintain rating and OC levels to maintain their investor base,” said Fitch.

Under the proposals, issuers would be required to provide a minimum OC level 5%, which would be ratings neutral for Fitch because it gives credit to public commitments from the Dutch issuers it rates to maintain OC levels of between 15% and 33% (the programmes have minimum contractual levels ranging from 3% to 15%, noted the rating agency).

“If the provisions are enacted, we would not expect any ratings impact on the Dutch covered bond programmes, which already feature liquidity provision in line with our covered bond ratings criteria and OC commitments above the proposed floor,” said Fitch.

In addition, the proposals from the Dutch Ministry of Finance state that covered bond programme’s liquid assets should cover interest obligations and other costs, such as swap expenses, due in the next six months. Fitch noted that all Dutch programmes have dynamic liquidity reserve funds in place to cover three months’ interest and costs, which is in line with the rating agency’s requirements.

The rating agency said noted that banks would have to have enough liquidity to meet principal redemptions due in the next 12 months where there is no maturity extension or where the bond is extendible by less than 12 months.

“ABN Amro Bank and ING Bank’s programmes would be the only ones affected by this change, as they issue hard bullet covered bonds,” Fitch said. “We take comfort from the high short term ratings threshold (F1+) in place in these programmes’ 12-month pre-maturity tests. Below this threshold, liquid assets must be posted to meet redemptions in the following 12 months.

“If the implementation of the proposal meant that this liquidity reserve would be in place in all circumstances, even when the short term rating is at or above the threshold, this would provide even more protection for the covered bonds,” it added. “But the change is unlikely to affect the maximum uplift between the bank’s rating and the covered bond rating.