Fitch and Moody’s have welcomed Singapore rules for covered bond issuance as benefitting investors and banks, but also noted limitations to the guidelines, for example their falling short of providing full clarity and legal protection on the segregation of assets.

The Monetary Authority of Singapore (MAS) released final rules for issuing covered bonds by Singapore-incorporated banks on 31 December, nearly two years after it circulated draft rules as part of a consultation in March 2012.

Monetary Authority of Singapore building (left)

Moody’s today (Thursday) said that the Singapore rules are credit positive for Singapore banks because “the framework balances the benefits of opening up a new low cost funding channel against protecting the interests of unsecured creditors” through a 4% cap on the size of the cover pool as a share of the bank’s total assets.

The rating agency identified DBS Bank, United Overseas Bank Limited and Oversea-Chinese Banking Corp Ltd as issuance candidates due to their strong mortgage portfolios.

“Although we expect limited issuance of covered bonds by Singapore banks in 2014 because of the low cost of unsecured funding, covered bonds will become a more attractive option as rising interest rates increase the spread between covered bonds and unsecured debt,” said Nick Caes, associate analyst at Moody’s.

The Singapore rules are also beneficial for investors, according to the rating agency.

Joe Wong, assistance vice president and analyst at Moody’s, said that provisions such as an 80% loan-to-value ratio (LTV) limit on residential mortgages, an overcollateralisation requirement of 3% and compliance checks by a third party auditor will help protect investors.

Fitch on Tuesday also welcomed MAS’s rules as benefitting investors by clarifying important points on liquid assets and disclosure, but said that “specific guidance is still lacking in some areas, including the means of asset segregation and the appointment, duties and powers of a covered bond administrator”.

It noted that the rules do not prescribe mitigants for bridging liquidity gaps in covered bonds, nor standardised data sets for reporting.

“The continued absence of a dedicated covered bond law, and the flexibility that banks have to structure their programmes, are consistent with our earlier expectation that Singapore covered bonds will rely on current law and contractual arrangements,” said Fitch.