Asia-Pacific covered bonds could be indirectly affected by potential slower economic activity resulting from the Covid-19 virus, according to Fitch, but the rating agency expects minimal direct consequences for cover pool performance and also downplayed the impact of Australian bushfires.

Fears over the economic consequences of the widening coronavirus outbreak resulted in equity markets falling sharply over the first half of this week and stymied new issuance in fixed income markets, although covered bond spreads have thus far proven resilient.

Fitch noted yesterday (Tuesday) that Covid-19 has not yet significantly affected the four Asia-Pacific jurisdictions where it rates covered bonds – Australia, New Zealand, Singapore and South Korea. It said it expects direct consequences for residential loan performance to be minimal, but that the extent of any impact will depend on the length of time the epidemic continues.

“We believe a larger problem would be the indirect issue of struggling businesses and loss of employment due to restricted movement across borders,” said Fitch. “This is likely to become more pronounced for borrowers, particularly those involved in tourism-related industries, should the restrictions remain in place.”

Covered bond collateral earlier escaped direct impact from the bushfires that have afflicted Australia in the past several months, with Fitch noting that cover pools are concentrated in high density areas that were largely unaffected by the fires – which recent rainfall has extinguished – in spite of a minor increase in hardship applications in Australia.

“Any mortgage loans in the cover pools that are deemed to be affected would most likely be removed from the pool,” the rating agency added, “if not, such loans that fall in arrears for more than 90 days would be excluded in the calculation of the asset coverage test. The covered bond programmes currently hold excess mortgage collateral, which is greater than that required under the asset coverage test, for additional protection.”