Proposed regulations to govern future Brazilian covered bonds (LIGs) are generally aligned with international standards, Moody’s said today, although it noted that some important points remain open to question. It added that the new instrument should be credit positive for Brazil’s largest retail lenders.

The regulations for the new instrument, letra imobiliária garantida (LIG, or real estate covered bonds), were proposed by Brazil’s central bank last Monday and, supplementing existing legislation, will be the final step in creating the country’s framework. Moody’s said it expects final rules to be out in June.

The rating agency said the proposed text generally aligns the regulations with international covered bond standards, such as minimum overcollateralisation levels, loan-to-value (LTV) limits and a 180 day liquidity test.

“However, there are still some open questions on the use of derivatives or potential set-offs against the cover pool, important points of clarification for covered bondholders,” it added.

It noted that a 10% cap on LIG issuance versus an issuer’s assets means that assets available for unsecured creditors will not be significantly reduced, while the dual recourse nature of LIGs and the ring-fencing of the cover pool could enable Brazilian covered bonds to receive higher ratings than the issuer’s senior unsecured debt.

The rating agency said issuing real estate covered bonds will allow banks to extend the average maturity of their liabilities because LIGs will have a minimum tenor of two years, although it expects issuance to be long-dated given the 10 year average duration of mortgages in Brazil.

“This will benefit lenders’ term structure versus the short term savings deposits currently earmarked to fund mortgages in Brazil,” said Moody’s, echoing its previous expectations.