Over-Collateralization 'Crucial' In Assessing Credit Enhancement

In a new Rating Methodology report, Moody’s has detailed how over-collateralization is one of the crucial analytical elements in its assessment of the credit enhancement from which holders of European covered bonds benefit relative to unsecured creditors. In addition, Moody’s pays close attention to interest rate and currency risk mitigants which help maintain the value of the cover asset pool. ‘These provisions together combine to create a liquidity buffer to mitigate substitution risk and allow covered bonds to continue performing even in case of issuer bankruptcy – thus reducing the default probability of covered bonds compared to a given issuer’s other obligations. Should covered bond payments need to be accelerated, the presence of over-collateralization then contributes to reduce the severity of loss.’, explained Alexandra Sleator, Senior Vice President and author of the report.

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