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Capital Markets

How rating agencies see it

It depends what you mean by covered bond

With any new structure the obvious place that investors will look for comfort is the rating agency analysis. The triple-A status of the Pfandbrief and obligations foncières markets is unquestioned, and it is that very foundation that has triggered some of the hostility towards structured covered bonds – with issuers questioning if the risks inherent in them should justify the same rating.

With any new structure the obvious place that investors will look for comfort is the rating agency analysis. The triple-A status of the Pfandbrief and obligations foncières markets is unquestioned, and it is that very foundation that has triggered some of the hostility towards structured covered bonds – with issuers questioning if the risks inherent in them should justify the same rating.

In the case of, for example, the French and US covered bond structures, the rating agencies are clearly relying in part on a legal opinion in making their judgement as to the bankruptcy-remoteness of the vehicles. Without being experts in international comparative law, it is difficult to see another approach that the analysts should take. But what if the legal opinion turns out to be wrong? "I would rather have a triple-A rated bond that is the result of stated legislation rather than a triple-A bond that is the result of rating agency opinion," says one investor.

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