Germany pips Belgium to top Moody’s framework ranking, Canada third
Germany has the strongest legal framework among 15 Moody’s has analysed, according to the rating agency, with Belgium second and Canada third, while some other countries’ outcomes improve significantly when market practice is taken into account.
The countries included in Moody’s ranking, released yesterday (Wednesday), are only those for which the rating agency has published a legal framework report since 2013 – Denmark, for example, is absent. Moody’s has previously published rankings based on certain aspects of legal frameworks, but this is the first time it has done so based on the overall legal framework.
(See here and here for examples of previous rankings.)
To come up with its ranking, Moody’s scores different aspects of covered bond frameworks – such as asset eligibility – and then aggregates, on a weighted basis, the various elements into an overall score. It also assigns adjusted scores taking into account market practice.
Germany beat Belgium to top spot by just 1% based on law alone, and 2% taking into account market practice.
| Rank | Country | Law only | Market practice | Market practice rank |
|---|---|---|---|---|
| 1 | Germany | 76% | 78% | 1 |
| 2 | Belgium | 75% | 76% | 2 |
| 3 | Canada | 70% | 74% | 3 |
| 4= | Finland | 69% | 72% | 4= |
| 4= | Sweden | 69% | 70% | 7= |
| 6 | Ireland | 67% | 70% | 7= |
| 7 | France | 66% | 69% | 11= |
| 8 | Portugal | 65% | 72% | 4= |
| 9= | Norway | 64% | 72% | 4= |
| 9= | Netherlands | 64% | 70% | 7= |
| 11 | UK | 62% | 69% | 11= |
| 12 | Italy | 61% | 70% | 7= |
| 13 | Singapore | 59% | 66% | 14 |
| 14 | Australia | 59% | 68% | 13 |
| 15 | Spain | 57% | 58% | 15 |
Source: Moody’s, The CBR
“The German framework, based on the law alone, is the strongest or equal-strongest in four of the six credit categories we assessed: cover pool management before issuer default; issuer default – general; cover pool management after issuer default; and refinancing the covered bonds,” said Moody’s. “The German framework is notable for strong legal principles that are not particularly reliant on market practice to shore them up.
“Nevertheless, when market practice is taken into account, Germany still has the strongest framework, indicating that market practice has an overall positive effect.”
When taking into account market practice, Italy and Norway achieve the biggest improvements in rank, the peripheral country rising from 12th to equal 7th and the Scandinavian from 9th to equal fourth. Their scores are boosted by 9% and 8%, respectively, while Australia’s improvement when considering market practice is equal highest with Italy, at 9%.
France suffers most in the market practice-adjusted ranking, falling from 7th to equal 11th, with its score improving only 3%, while the difference between the law-only and market practice scores is lowest for Belgium, Spain and Sweden, at just 1%.
While Germany is top in four of six categories analysed by Moody’s (jointly in two categories), Canada is strongest in asset and covered bond eligibility – joined by Norway when market practice is taken into account – and Spain and Belgium are strongest in cover pool and cashflow segregation and priority rights, with Italy taking top spot in this category when market practice is taken into account.
Spain comes last in both overall law-only and market practice-adjusted rankings.
“The Spanish law contains relatively few of the individual legal features that make up a comprehensive legal framework for covered bonds,” said Moody’s. “However, from a credit perspective, the high OC (overcollateralisation) levels required for Spanish covered bonds can compensate for this.”
The rating agency notes that the proposed EU covered bond directive should lead to changes to some national laws that would strengthen them and lead to improvements of its scoring of elements of the frameworks.
