Recent changes to a draft covered bond law in Romania further strengthen the proposed framework, according to Moody’s, but it said some features remain weaker than in legislation found in more established markets.

If implemented, the draft legislation, which was proposed by the Ministry of Finance in April 2014, will revise Romania’s Mortgage Bond Law of 2006 with the aim of opening up the market for mortgage-backed covered bonds.

Moody’s said one of the strengths of the amended draft law is the introduction of a new stressed asset cover requirement. The rating agency noted that the existing requirement that the net present value (NPV) of the cover pool is at least 102% of the NPV of the covered bonds must also be met on a stressed basis. The detail of the stressed NPV test will be specified in secondary regulations.

“Applying stresses to the interest rate curves and exchange rates used in the NPV test before an issuer default is a way to limit the exposure of the cover pool to the interest rate and currency mismatches that may arise after an issuer default,” Moody’s said. “A robust stressed NPV test typically describes the method of calculation in detail, applies meaningful amounts of stress to the relevant risk factors and requires frequent testing.”

Moody’s also highlighted that the amended draft law provides that swaps in the cover pool cannot specify insolvency of the issuer as an event of default, which, it said, ensures legal clarity.

However, the rating agency noted that the draft law still subordinates swap counterparties to covered bond investors, which it had previously noted as a weakness of the proposed law in November 2014.

Moody’s said this is likely to make it difficult to find counterparties outside the issuer group who are prepared to enter into hedging arrangements for the cover pool. In the absence of an external swap counterparty, subordination increases the likelihood that swaps terminate and are not replaced in the event of an issuer default, it said.

The rating agency also said the draft law provides for the appointment of a dedicated cover pool administrator if an issuer defaults, or pre-default if a cover pool does not satisfy the unstressed asset cover requirement and there is no prospect of it satisfying that requirement.

However, while the rating agency described the provision of a dedicated cover pool administrator as a strong feature of a covered bond framework, it added that the draft law provides the administrator only limited options to fulfil its function.

“Although the draft law anticipates the sale of the entire cover pool or the transfer of the cover pool and the covered bonds as a package, it does not give the administrator the ability to sell part of the cover pool, or to borrow against the cover pool, in order to make principal payments,” it said. “Because of these limitations, there could be a greater risk of failure to make timely payments on the covered bonds.”