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S&P's refined approach

Issuers have taken the keenest interest in Moody's covered bonds policy, but Standard & Poor's announced in October that it was refining its approach to rating European covered bonds. The rating agency said that the variety of legislation in Europe meant that investors were asking it to clarify how it rated covered bonds. Specifically, investors want timely payment, and reassurance on how their investments are likely to be affected by the insolvency of an issuing bank.

Asset pool emphasis

While the debate surrounding Moody's approach focuses on its attitude to delinkage, S&P is looking at asset pools.

"We are formalizing and making more transparent two aspects of our rating analysis on covered bonds in jurisdictions where the analysis focuses primarily on the asset pool, and is to a large extent already delinked from the issuer's counterparty rating," says Alain Carron, managing director at S&P's structured finance ratings group in London. "The two aspects being clarified are the cover pool's access to liquidity and the level of overcollateralization available."

To monitor more closely sudden insolvency risk, which varies wildly from jurisdiction to jurisdiction, S&P will ask covered bond issuers to report the cover pool's liquidity needs in a run-down simulation for the coming six months.

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