New ECB guidelines that render repo-ineligible covered bonds backed by cover pools including external ABS are credit negative for all covered bonds featuring ABS collateral because they will increase refinancing risk, said Moody’s today (Tuesday), noting that issuers’ use of ABS may change.

According to updated ECB guidelines announced on 28 November, cover pools containing external ABS are no longer eligible for ECB repo transaction, although covered bonds backed by ABS assets originated within the issuer group remain repo eligible. (See previous coverage here.)

Moody’s said that the move increases refinancing risk for all covered bonds (i.e. those with internal as well as external ABS) that have ABS assets in their cover pools because it will reduce the purchase prices of cover pools containing ABS should they need to be sold.

“This is because any prospective purchaser will no longer be able to use these ABS assets as assets in their cover pool, without making all covered bonds issued out of the programme ineligible for ECB repo,” it said. “Under the new repo guidelines, there is no minimum threshold to allow exceptions for cover pools with a small proportion of ABS assets originated outside the issuer group.

“Therefore, we expect that the refinancing risk for cover pools with ABS will differ significantly from those solely consisting of loan assets.”

Moody’s noted that among European covered bond programmes it rates, only French programmes contain ABS. According to the rating agency, as per 30 September former Dexia Municipal Agency –  now Caisse Française de Financement Local – had a public sector covered bond programme that contained 11% public sector ABS, while AXA Bank Europe SCF had a programme with a cover pool entirely consisting of RMBS assets. CIF Euromortgage’s cover pool included 76% RMBS, and Crédit Foncier de France (Compagnie de Financement Foncier) 7.9%.

However, Moody’s said that it expects the usage of ABS assets in cover pools to change, as the amendments to the ECB repo eligibility rules will probably make it more expensive for issuers to issue covered bonds backed by a cover pool containing ABS.

“This, in turn, creates an incentive for issuers to eventually restructure the programmes in order to maintain the repo eligibility and keep issuance spreads low,” said the rating agency.

The new rules come into effect November 2014. Moody’s also noted that covered bonds issued before the eligibility change are grandfathered and will therefore remain repo eligible for two years.