Belgium’s legal framework for Pandbrieven has a number of key strengths that make it “one of the stronger covered bond frameworks”, according to Moody’s, with the rating agency adding that weaknesses are mitigated by market practice.

In a sector comment published on Wednesday, Moody’s said the Belgian legal framework, introduced in 2012, includes relatively prescriptive requirements, notably on asset and liquidity coverage, as well as strong independent oversight.

The report is the latest of a series in which Moody’s discusses common sets of legal features in different covered bond jurisdictions, comparing the strength of each against an “average” legal framework, to enables readers to make detailed comparisons across jurisdictions.

The rating agency highlighted four key strengths of the Belgian framework:

• A 5% minimum overcollateralisation (OC) test whereby the cover pool must withstand sudden unexpected interest rate and currency movements;
• A requirement that issuers maintain six months’ liquidity coverage;
• A regime for strong independent management by an independent cover pool administrator (gestionnaire de portefeuille) after issuer default, who can refinance the covered bonds with a high degree of flexibility and has a clear mandate to act in the interests of bondholders; and,
• That upon issuer insolvency, the Belgian law has two layers of protection against commingling and substantially excludes set-off and claw-back risk.

Moody’s also cited strengths in contractual market practice in Belgium, including that all covered bond programmes contain exclusively either residential loans or public sector loans, and do not contain any commercial property loans. It noted that for residential loan programmes, all properties are located in Belgium, while for the public programme all borrowers are Belgian entities.

Belfius Bank is the only Belgian issuer to have a public sector Pandbrieven programme.

“While the list of strengths largely outweighs that of weaknesses, giving Belgium one of the stronger covered bond legal frameworks, Moody’s also acknowledges some weaker features,” the rating agency noted.

Moody’s cited as being among these weaker features the fact that OC above the 5% minimum level may from the outset – when the loan is first added to the pool and not as a result of falling property values – come from loan parts with high loan-to-value ratios. It also noted that the law does not require a net present value (NPV) test for determining cover pool asset coverage relative to covered bonds.

However, the rating agency said market practice may mitigate these weaknesses, contractually or otherwise, noting as an example that the National Bank of Belgium requires issuers to report asset coverage on an NPV basis every quarter.