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Covered bonds: Borrowers chafe at rating agencies’ demands

As covered bond markets continue to thrive worldwide, it appears that the demands of ratings agencies might be becoming a stumbling block.

"Ratings agencies are becoming more and more demanding in terms of the amount of information needed to rate covered bonds," says Andrea Montanari, a director in UBS’s DCM department, who was previously responsible for covered bonds at Fitch Ratings. "Apart from the customary quarterly surveillance, agencies are in some cases trying to get information on an even tighter frequency."

In fairness, supplying the right information on a covered bond issue is a key factor in the deal’s success.

Investors are becoming more and more sensitive to the structure of covered bonds, especially in terms of the cover pools. With the dynamic nature of the cover pools, supervisory requirements are strict. But there are significant time restraints, most notably for smaller borrowers and those new to covered bonds. For larger, experienced issuers of covered bonds, it is easier to comply with ratings agencies’ demands, as these institutions often have well-organized and effective reporting methods that are easily applied to each new issue. When setting up a new programme, a lot more work is required. "I’m structuring some covered bond mandates at the moment, and I’m spending my weekends filling out templates," grumbles one banker.

Time consuming

The ratings agencies all have standard templates that need to be filled out by covered bond issuers, at the launch of the issue and, generally, quarterly thereafter.

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