The ICMA Covered Bond Investor Council (CBIC) has welcomed proposed change to Moody’s anchor point for covered bond ratings, after having in August called for rating agencies to reflect the implications of bail-in in their methodologies.

The investor body wrote to the rating agencies on 7 August raising various concerns about their covered bond methodologies, including elements related to bail-in. Meanwhile, Moody’s on 19 September launched a request for comment (RFC) on proposals that would increase the possible uplift between issuer ratings and covered bond ratings.

“We welcome the idea of modifying the anchor point as a proxy for the probability of the issuer ceasing to make payments to the covered bondholders in the light of forthcoming regulation on bank resolution,” said the CBIC in its response to the RFC. “As the TPI [Timely Payment Indicator] framework is not supposed to change, this step is appreciated, especially in keeping the comparability of ratings over time intact.

“We also welcome the temporary stop of covered bond downgrades until this modification is implemented, as already outlined in our letter to the rating agencies dated 7 August 2013.”

As it did in its earlier letter, the CBIC acknowledged the difficulties faced by the rating agencies, specifically in Moody’s case in finding an appropriate and consistent approach to determining the anchor point for its covered bond ratings.

“The approach outlined so far by either uplifting the adjusted Baseline Credit Assessment (BCA) or the senior unsecured rating (SUR) is based on quantitative factors, namely the amount of bail-in-able debt in proportion to the total liabilities,” said the CBIC. “As support is already incorporated in the SUR, one might additionally think of some kind of minimum anchor points for highly relevant domestic covered bond issuers as there could be elements of support which are of more help in the covered bond market than in the senior unsecured market, for example market size in national mortgage market and/or index weights.

“As this new approach should become applicable throughout the EU and other countries closely following EU regulation,” it added, “we nevertheless ask in advance for sufficient rating leeway/national discretion in terms of the final rating methodology to reflect possible differences in bank resolution regimes across various countries.”

The investor body also raised various points it suggested Moody’s consider, including: adjusting the methodology to take into account specialised covered bond issuers that may not take deposits or issue senior debt; being sensitive to how different types of senior unsecured bondholders – retial versus institutional – might be treated in bail-in and how this would affect thresholds for bail-in-able debt set by Moody’s; and other factors relating to how elements of the rating agency’s proposals are calculated.

“We would like to emphasise that we share Moody’s view that the proposals regarding bank resolution will be largely credit positive for covered bonds,” the CBIC concluded. “Accordingly, we welcome the envisaged changes and are looking forward to further discussions regarding the clarifications suggested above.”

The CBIC’s letter is dated 21 October, when Moody’s RFC period ended. It is due to be available on the ICMA website shortly.