The recent tightening of European legislation for covered bonds has led to the emergence of a set of ‘best practices’ and is making legal frameworks for covered bonds more comparable across Europe, said Moody’s Investors Service in an updated Rating Methodology report on European covered bonds (ECBs). However, despite the increasingly similar ECB frameworks, Moody’s states that their relative strengths and weaknesses warrant adopting different rating notching practices across countries and justify rating covered bonds between one and four notches above the senior unsecured debt rating of a given issuer. Moody’s rating approach for ECBs emphasises the strengths of these secured debt instruments relative to the senior unsecured debt obligations of a given issuer. ‘In particular, covered bonds exhibit a lower severity of loss than the unsecured obligations of a given issuer, and specific bondholder protections in case of issuer insolvency may also further reduce covered bonds’ probability of default,’ said Alexandra Sleator, SVP/Co-ordinator for European Covered Bond Ratings.
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