Proposed changes to Polish covered bond legislation that would introduce maturity extensions and conditional pass-through techniques, as well as relaxing LTV limits and increasing OC requirements, are predominantly credit positive, Moody’s said yesterday (Wednesday).

The rating agency noted that the Polish Ministry of Finance published the detailed proposals in July and that, if implemented, they will limit the risk of time subordination among bondholders and reduce refinancing risk.

Moody’s said that under the prevailing legislation acceleration of individual covered bonds upon a missed payment of a specific series could lead to an early acceleration, thereby creating a risk of time subordination among bondholders. The possibility of this happening will be limited under the proposals and is seen as credit positive.

The proposals foresee an automatic 12 month maturity extension of all outstanding covered bonds at the time of issuer insolvency, reducing any immediate refinancing risk, said Moody’s.

After an issuer insolvency, semi-annual and quarterly tests will be conducted to see if cover assets and liquidity, respectively, are sufficient to cover payments under the proposals. Should either test be failed, repayment will switch to a pass-through structure whereby the maturity of all bonds will be extended to the longest dated asset plus three years and all bondholders treated pari passu and pro rata for principal payment.

“Although we are still waiting for the final law for more details on how the two tests will operate, the implementation of liquidity and asset coverage tests together with the pass-through scenario they trigger should improve timely payment for bondholders,” said Moody’s.

The rating agency also noted that mortgage pool eligibility criteria are being relaxed through higher permitted loan-to-value (LTV) levels, but that at the same time a commitment to higher minimum legal overcollateralisation (OC) requirements is envisaged in the proposals.

Moody’s highlighted the LTV changes, whereby the LTV threshold is increased from 60% to 80% for residential mortgage loans, as a credit negative aspect of the proposals.

“This will bring the LTV threshold in the Polish covered law more in line with international peers,” it noted, “but increases the possible amount of covered bonds that can be issued against a certain pool of assets.”

The proposal for a minimum OC requirement (based on nominal values) envisages a level of 10%, according to Moody’s.

“This is a credit positive for Polish covered bonds as it adds a reliable minimum level of protection for covered bondholders against remaining refinancing risk and other risks including credit risk and currency and interest rate mismatches,” said the rating agency.

Photo: The lower house of Poland’s parliament (Sejm); Source: Kpalion, Wikimedia Commons