Changes to Germany’s legislative covered bond framework in the last two years have added beneficial features, according to Moody’s, which cited the introduction of requirements regarding derivatives and new powers for the regulator.

Moody’s today (Wednesday) published a report that updated its analysis of the strengths and weaknesses of Germany’s covered bond framework, primarily in the form of the Pfandbrief Act, in light of amendments introduced since September 2013, when Moody’s first provided such an examination of the framework.

The report is part of a series in which the rating agency discusses common sets of legal features in different covered bond jurisdictions, ranking each legal feature as Strong, Average or Weak relative to a benchmark average or typical covered bond legal framework. This enables readers to make detailed comparisons across jurisdictions, says Moody’s.

The rating agency said that no scores assigned to German legal features have been changed in the updated report, but cited amendments made since 2013, concerning derivatives counterparties and the powers of regulator BaFin, as having added beneficial features to the framework.

Martin Lenhard, vice president and senior analyst, Moody’s, picked out in particular the introduction of minimum requirements in respect of the credit quality as well as the collateralisation of derivatives included in cover pools.

He also noted that under the amendments BaFin can now impose upon a certain covered bond programme a minimum OC level beyond the 2% statutory minimum if it is considered necessary to compensate for higher collateral risk.

Overall, the report identified three key strengths in the framework: a relatively low loan-to-value threshold for mortgage assets of 60% and conservative valuation requirements for the underlying property; a continuous net present value test as well as a 180 day liquidity reserve for interest and principal payments; and strong independent oversight from the cover pool monitor before issuer default, and management by an independent administrator after default.

While stating that strengths outweigh weaknesses, Moody’s also highlighted some negative features.

These include possible high single-obligor concentration, potentially elevating the credit risk of commercial property loans in particular and the possibility that programmes may be exposed to 100% ship or aircraft finance loans. However, Moody’s noted that programmes with these characteristics are uncommon.

Moody’s also listed as a relative weakness that bondholders’ security over assets located outside the European Economic Area may not be assured, but added that some issuers have implemented trust solutions. Furthermore, Moody’s noted such weaknesses may be mitigated by market practice.