Amendments to French covered bond legislation that have tightened overcollateralisation requirements and reduced ties to and correlation with sponsor groups are credit positive for covered bond investors, according to Moody’s.

The changes to legislation for obligations foncières (OFs) and obligations de financement de l’habitat (OHs), which came into force on 28 May, increased the minimum level of overcollateralisation (OC) from 2% to 5% and refined the definition of legal OC, which in turn has strengthened the OC test, Moody’s said on Monday.

As a result of increasing the legal minimum level of OC to 5%, the value of collateral in the event of a covered bond anchor event will likely increase, according to Moody’s. The rating agency noted that while it considers sponsor ratings and contractual commitments to maintain overcollateralisation, it sometimes gives limited to no value to voluntary OC that can be removed prior to an anchor event.

Moody’s said that a change to the legal definition of overcollateralisation relating to intra-group loans is also credit positive. According to the rating agency, the new legislation states that when intra-group loans in the cover pool exceed 25% of the value of the issuer’s non-privileged liabilities, a portion of such loans will be excluded for the purpose of calculating the OC test.

“This adjustment is credit positive because it limits the risk that covered bond issuers rely on assets directly exposed to the credit quality of their parent or any of their affiliates,” said Moody’s. “Upon a covered bond anchor event, these assets are likely to have limited value because of a high default correlation within the sponsor group.”

The legislative changes also clarify maturity-matching requirements that were already included in the French framework, according to the rating agency. From 31 December 2015, the remaining average life of cover pool assets must not exceed that of covered bonds by more than 18 months (with only cover pool assets strictly necessary to satisfy the 105% OC test being included in this calculation).

“By clarifying the definition of the maturity-matching requirement, the updated framework requires issuers to reduce liquidity and refinancing risks because better maturity matching between assets and liabilities reduces the risk of an asset fire-sale upon a covered bond anchor event,” said Moody’s.

Under the changes, possible reliance on bank loan facilities to cover liquidity requirements has been limited. The liquidity requirement of covering 180 days’ cashflows takes into consideration principal and interest on assets, any substitute assets, and any repo-eligible assets, but, following the amendments, any additional facility agreement – whether intra-group or not – cannot be included.

“This amendment is credit positive because it reinforces the 180-day liquidity test by effectively limiting intra-group facility agreements as a source of liquidity,” said Moody’s.

The rating agency also noted that the amendments contain general provisions that it believes will mitigate operational risks that may arise in the case of a sponsor default.

“In particular, the issuer must identify the necessary resources to service the cover pool and include a description of the procedures for transferring the servicing activities to another entity in the sponsor bank’s recovery plan and provide that to the regulator on an annual basis,” it says.