Moody's: Covered Bond Bill (H.R. 5823) Positive - But Shortcomings
Negatives include an amendment fragmenting regulatory oversight
08/03/2010
The latest version of U.S. covered bond legislation (H.R. 5823) — which recently won a favorable vote from the House Financial Services Committee (HFSC) — offers both pluses and minuses, according to a comment published by Moody's Investor's Service (August 2).
On the plus side, the bill "will help investors in covered bond transactions because it will set up investor-friendly procedures following an issuer default." In such a situation, there would be an established mechanism for transferring the cover pool to a separate legal estate, which would be administered for the benefit of investors so as to continue making scheduled payments over time.
Yehudah ForsterIn addition, the bill provides certain protections to the administrator so as to minimize the potential for disruption, while preserving deficiency claims that a bondholder may have against the issuer's estate.
But Moody's comment, written by VP and Senior Analyst Yehudah Forster, also points to at least two negative aspects of H.R. 5823.
One negative is that the bill "provides for overcollateralization levels that will not address market value risk." This is largely because covered bond regulators are specifically directed not to take liquidity risk into account when setting minimum overcollateralization levels.
The other big negative, according to Moody's, comes from an amendment that was incorporated into H.R. 5823 at the HFSC's markup session (July 28). Instead of providing for oversight of all covered bond issuance by a single regulator, the amended bill now "appoints the issuer's primary regulator as the covered bond regulator."
"Since the regulators are in charge of setting standards, this feature could lead to inconsistency between programs and reduce transparency for investors," Moody's comment states. "It could also lead to a conflict of interest since the goals of the issuer's primary regulator may not always be aligned with covered bondholders."
Moody's comment on H.R. 5823 appeared in the rating agency's "Weekly Credit Outlook" (August 2). Earlier this year, Moody's released a comment relating to a now-superseded version of proposed covered bond legislation, H.R. 4884. Both H.R. 4884 and H.R. 5823 bear the same title, the "United States Covered Bond Act of 2010." Both bills were introduced by Rep. Scott Garrett (R-NJ).
H.R. 5823 is currently eligible for further consideration and a possible vote by the full House of Representatives in this Congressional term.
Related: