News on Covered Bonds: Covered Bonds not risk free – S&P Covered Bond Ratings Director speaks

Covered Bonds not risk free – S&P Covered Bond Ratings Director speaks

 

15th August, 2011: Covered Bonds recently have been well received by investors and have seemingly gained a high profile with issuers and investors. Standard & Poor's Director Sabrina Miehs, of the Covered Bond Ratings Group, on Credit Matters show, discussed the wide range of collateral types and diverse risks underlying different covered bond programs.

Some of the risks attached to covered bonds are, the asset type in the pool, jurisdiction in which they are issued, structural risk, asset liability mismatches, counterparty risk and over-collateralisation in the pool and so on.  The methodology adopted by S&P for rating such covered bonds is typically looking at the cashflows from the underlying assets, the timely and full payment of interest and principal and the loan pools backing the covered bonds are monitored on a regular basis, whereas other rating agencies approach is looking at the sum of expected losses, ALM, interest rate risk and foreign exchange risk.

Further she mentioned that the general misnotion is that the issuer downgrading would impact the rating of covered bonds as well however issuer downgrading may or may not be affecting the rating of the covered bonds at all. It is also believed that covered bonds are vanilla products and are almost risk-free.  The view however is incorrect as there lot of credit risks attached to the product.

(Reported by: Nidhi Bothra)