Changes to Singapore’s covered bond framework proposed by MAS last week would be credit positive for issuance from the jurisdiction, Moody’s said today (Thursday), with Fitch having said yesterday that they will provide more flexibility and that the market could open as early as mid-2015.

The Monetary Authority of Singapore on Thursday of last week published the proposed amendments to a framework it established at the end of 2013 but which has not yet been issued under.

Fitch said that the proposed changes put Singapore “one step closer” to an active covered bond market and that it expects this to open as early as mid-2015. Moody’s said it expects Singapore banks to issue their maiden covered bonds in 2015 to widen their investor bases and better manage their asset-liability profiles, but was guarded in its expectations.

“However,” it added, “issuance will be limited because the credit strength of the main Singapore banks enables them to raise funds at low cost without offering collateral security.”

Fitch noted that updated rules on the segregation of assets will allow the covered bond issuing banks to hold assets on-balance sheet under a declaration of trust.

“This addresses a technical issue of payment ranking rights for mortgage recoveries, and will ensure covered bond holders have first ranking security over defaulting loan recoveries,” it said.

Moody’s said that the MAS amendment to clarify unsecured claims against the issuing bank will allow covered bond investors to take timely action against the issuing bank.

“If the bank defaults on its obligations under the covered bonds, investors will be able to pursue their unsecured claim regardless of whether the cover pool is, or is expected to be, sufficient to pay off the covered bonds,” it said. “Before the amendment, there was uncertainty about whether covered bond investors would have recourse to the issuing bank before the cover pool was fully utilised. This, in turn, could delay the claim against the issuing bank.”

The rating agency noted that the amendments will also permit cover pools to hold more than 15% of assets in cash to refinance maturing covered bonds. It said this will improve the liquidity of the cover assets and provide more time for other cover pool assets to be sold or refinanced.

“This improved flexibility to hold greater amounts of cash assets for refinancing purposes will enable structural mechanisms to mitigate refinancing risk in covered bonds,” said Moody’s.

And Fitch noted that under the proposals rules governing an 80% LTV limit for residential mortgages will be tightened to specify that the limit applies at the point of inclusion of the loans into the cover pool.

“This means that loans with a current LTV above 80% due to changing property or loan values will not be removed from the portfolio,” it said. “In addition, the portion above 80% for loans in such a situation, will not be counted towards the minimum overcollateralisation requirement.

“Notably, all of these loans, including those in excess of the limit, must still be calculated for the purpose of the 4% encumbrance limit on the proportion of total bank assets that can be pledged to covered bonds.”