Proposed changes to the Czech Republic’s covered bond laws would address key weaknesses in the country’s outdated framework and strengthen the Czech product, according to Moody’s, which highlighted amendments that would clarify investors’ rights to OC and address acceleration in the event of an issuer default.

Czech covered bond issuance has to date been limited, with only two public, syndicated deals sold from the jurisdiction. The country’s covered bond laws, which stem from 1992 and differ from European best practices, are considered to be partly responsible for the slow development of the market. Draft legislation, which includes changes to the framework that will bring it in to line with more accepted standards, is currently with the Czech parliament, and the changes are widely expected to take effect in January 2018. Issuance and investors’ interest in the market expected to increase thereafter.

In a sector comment published yesterday (Monday), Moody’s said the proposed changes would be credit positive for Czech covered bonds, because they would address key weaknesses in the current framework.

Specifically, the rating agency said the proposals would clarify that investors’ priority right to the cover pool extends to overcollateralisation (OC) within the pool – something that is not made clear by the current framework. Moody’s has given limited value to OC in its analysis of Czech cover pools as a result, thereby constraining the ratings assigned to Czech covered bonds.

The proposals would also reduce refinancing risk, Moody’s said, noting that currently the Czech law triggers acceleration of covered bonds n the event of an issuer default. This, it added, has been the main driver of the “very improbable” Timely Payment Indicator (TPI) that it has assigned Czech programmes.

The rating agency said the proposals would further strengthen Czech covered bonds by adding new features to the law such as a minimum 2% OC requirement, a provision for the use of derivatives to hedge interest rate and foreign currency mismatches, and a requirement that an independent administrator must take control of cover pools following an issuer default.

Some weaknesses would remain in the Czech covered bond law if the changes are implemented as currently proposed, Moody’s noted, such as a lack of any specific requirements for liquidity coverage.

The proposals also include new provisions on cover pool monitors, but Moody’s noted that in contrast to EBA proposals, the appointment of a cover pool monitor would not be mandatory. Similarly, LTV thresholds would be introduced, but the proposals would allow issuers to set up programmes that do not meet CRR standards.

However, it said these weaknesses could be mitigated by market practice and may be addressed by efforts to harmonise European covered bond laws.

Photo: Raiffeisenbank a.s.