Fitch is calling for greater guidance for disclosure via the Covered Bond Label Harmonised Transparency Template (HTT), saying that the way some issuers are completing HTTs can be inconsistent and misleading, potentially making it difficult for investors to fully understand risks.

The HTT is updated annually and this year’s version, which was agreed upon in September 2018, will be used for the first time at the end of the first quarter.

Fitch said on Wednesday that although standardisation of reporting has progressed with the introduction of the HTT in 2016, “poor consistency in certain aspects makes it difficult for investors to fully identify risks”. It said such problems are particularly relevant to currency and interest rate mismatches that are often the main driver of the rating agency’s breakeven overcollateralisation (OC) for a given rating level.

Speaking to The CBR, Hélène Heberlein, manging director at Fitch, cited an example where an issuer created “very misleading” data relating to issuance currencies and hedging.

She said the issuer inputted into a “nominal (before hedging)” column amounts in their currency of issuance, which were then – “quite surprisingly” – summed by the HTT Excel file, and percentages were then automatically calculated for each currency. The issuance amounts for each currency after conversion into the cover pool’s currency were also entered into a “nominal (after hedging)” column, but although the resulting percentages were correct, Heberlein said the amounts should rather all be listed under the end-currency to reflect that there are no currency mismatches after hedging (the programme is fully hedged).

“For anyone who is looking at it,” said Jan Seemann, director, Fitch, “percentages in the ‘before hedging’ column are completely meaningless, percentages in the ‘after hedging’ column in reality mean before hedging, and we don’t see the distribution after hedging. Most issuers will hedge 100% of their foreign currency bonds into their domestic currency, but not necessarily always, and from this data you can’t know what the true currency risk is if issuers are partially hedging their programme.

“What is very clear to us is that the HTT was constructed in one way, but some issuers are populating it in another way,” he added. “They probably haven’t checked what message it translates into, especially compared with the stated hedging strategy, which appears elsewhere in the HTT.”

Seemann said another issue is inconsistency in the reporting of arrears data. Some issuers include in a “<30” days field mortgages that are current as well as those that are in arrears by up to 30 days, resulting in a figure of, for example, 99%, whereas others only include those that are in arrears of up to 30 days, which may be, say, 1%.

“From an analytical perspective, showing large percentages in that bucket doesn’t tell you anything,” said Seemann. “It just looks worse than it probably is. And if all performing assets are included, then you have no idea what proportion has actually missed a payment.

“It confuses more than it helps.”

Heberlein – who is a market representative on the Label advisory council – said HTTs remain a prime source of information for the rating agency when it is preparing individual surveillance reports, which are also required by the ECB for repo eligibility.

“If you compare the HTT to what we previously had, it is already a lot more harmonised, and I’m sure it will improve more,” she said. “These are details, but as with everything, you want this to be the best it can be.

“There are easy fixes and we hope that by raising the matter publicly issuers will pay more attention to how useful the information they are providing is.”

Luca Bertalot, EMF-ECBC secretary general and Covered Bond Label Foundation administrator, said the latest updates to the HTT should result in improvements in the upcoming Q1 reporting, and that work will already begin on next year’s update at the next ECBC plenary, on 24 April.

“We are well aware of such inconsistencies,” he said, “and that is why we are trying to improve the harmonisation and standardisation of the HTT. Little by little, we are making the HTT more rigid and reducing the margin for interpretation for issuers.

“We appreciate feedback from members of the Label advisory council and the wider market,” he added, “which gives us the ammunition to improve over time.”