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Covered bonds: The Pfandbrief beats a hollow drum

Are Pfandbrief issuers out of touch with modern rating methods?

Early last month, the association of German Pfandbrief banks (Verband Deutscher Pfandbriefbanken – VDP) met to discuss the ratings agencies’ methodology for rating covered bonds. The members of the VDP feel that the type of data asked for by the agencies, specifically that relating to the cover pools, is overly constricting in terms of the amount of time and investment required to provide it.

The role of ratings agencies in the covered bond market has become increasingly central as the product has grown away from its German roots. For issuers to position their covered bond programmes as an alternative to government debt, a triple-A rating is essential. This gives the ratings agencies an extraordinary amount of power. "With covered bonds, additional over-collateralization requirements are set by the ratings agencies, which gives them a quasi-regulatory role in covered bond structures," says Rob Robinson, covered bond analyst at Merrill Lynch. "Although there is room for covered bonds that are not rated triple-A, the core of the market is triple-A paper that can be used as a rate product substitute."

As covered bonds have developed, so has the methodology used for rating them. The VDP has been outspoken in its disapproval of unregulated, structured covered bonds, especially those issued in countries that have regulated frameworks in place, such as the recent Landesbank Berlin issue.

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