DBRS is readying itself for rating public sector-backed covered bonds, with the launch yesterday (Monday) of a request for comment on two new methodologies relating to the instruments themselves and the underlying collateral.

DBRS currently only rates mortgage-backed covered bonds. However, it rated the pre-legislation programmes of Canadian issuers that were backed by mortgages insured by crown corporation Canada Mortgage & Housing Corporation (CMHC), and these were considered by many market participants to be quasi-public sector covered bonds.

In the methodologies unveiled yesterday, public sector collateral is qualified as direct or indirect exposures to exposures explicitly and unconditionally guaranteed by sovereigns, regional and local governments, and public sector entities (in turn including government-related entities (as defined elsewhere by DBRS), public hospitals, public universities, social housing providers and other public corporations).

Under a public sector exposures (PSE) modelling assumptions methodology, if a PSE pool is largely concentrated in a single sovereign, it can rarely (if at all) be expected that a reasonable level of overcollateralisation may suffice to withstand a full rating category (i.e. three notches) above the rating of the sovereign in which the exposures are domiciled (the Domicile Sovereign).

And under a PSE covered bond methodology, if at least one-third of a cover pool is located in the sovereign in which the Reference Entity is located (the Host Sovereign), the covered bonds may not be rated more than three notches above the rating of the Host Sovereign.

DBRS has requested comments by 17 August.