The inclusion of loan amounts above a 60% LTV limit for covered bonds issued under Austria’s Pfandbrief Act is beneficial for covered bondholders, according to Moody’s, which arrived at the conclusion after reviewing a legal opinion solicited by one of the Austrian issuers.

Austrian banks that issue under the Pfandbrief Act and whose covered bonds Moody’s rates include Hypo Noe Gruppe Bank, Hypo Tirol Bank and Hypo Vorarlberg.

Moody’s in November offered a similar view after reviewing Austria’s Mortgage Bank Act.

Austrian covered bonds are issued under three different pieces of legislation: the Mortgage Bank Act (Hypothekenbankgesetz), under which Erste Bank UniCredit Bank Austria issue; the Pfandbrief Act (Pfandbriefgesetz), under which the aforementioned banks and their peers issue; and the Covered Bond Act (Gesetz betreffend fundierte Bankschuldverschreibungen), under which Bawag, Kommunalkredit, the Raiffeisen banks and Österreichische Volksbanken issue. The industry has been working on unifying the three laws but this is yet to be finalised.

The rating agency said on Friday that, under the Pfandbrief Act, loan parts exceeding an issuance limit typically set at a 60% loan-to-value (LTV) ratio are eligible for inclusion in the cover pool and available to covered bondholders if the full loan amount is registered in the cover pool register. (It noted that while the LTV for mortgage cover assets is typically set at 60% for mortgage cover assets in the articles of association of Austrian Pfandbrief issuers it is typically set at two-thirds of the collateral value for agriculture and forestry.)

“This inclusion of the loan parts exceeding the issuance limit is credit positive for Austrian Pfandbriefe because the registration of the full loan amount increases the amount of assets available to covered bondholders,” said Moody’s. “However, the lower credit quality of over-collateralisation (OC) made up of loan parts with LTVs that exceed the 60% LTV ratio may partly offset the benefit provided by an increased amount of cover assets.”

It noted that Austrian issuers it rates limit covered bond issuance to an amount equal to the first 60% LTV of each loan in the cover pool, and said that the benefit provided by loan parts beyond the LTV ratio threshold is “a particularly material” benefit” in Austria given the low 60% LTV ratio compared with 75% or 80% levels in most other jurisdictions.

While the analysis now holds for the Pfandbrief Act as well as the Mortgage Bank Act, Moody’s noted that it still gives no value to loan parts with an LTV ratio in excess of 60% for programmes issued under Austria’s Covered Bond Act.

Photo: Hypo Noe Gruppe headquarters, St Pölten, Austria; Source: Ralf Roletschek/Wikimedia Commons