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Surveillance
With the permanent replenishing of the collateral pool, S&P constantly monitors the maintenance of the quality of the collateral pool. Furthermore, underwriting and risk management as well as sufficient over-collateralisation are also reviewed on a regular basis. The reporting frequency is linked to the economic soundness, credit quality and counterparty rating of the issuer. The frequency can vary between quarterly and weekly reporting. If the issuance of a new bond were to substantially change the liability cash flow structure, the issuer might be forced to apply for a rating approval prior to any new issuance.
Issuer’s scope
For issuers, the most important consequence of the structured finance approach is that they can to a certain extent directly influence the rating of their CB by providing the required degree of over-collateralisation. It also means a weakening of the unsecured rating of the issuer or of its parent company has no immediate effect upon the CB rating. As long as the issuer provides the over-collateralisation required by S&P, its CB will able to retain the target rating, which so far has always been ‘AAA’.
In this context, the issuers also have the opportunity to employ S&P’s covered bond monitor, enabling them to evaluate the impact of any subsequent restructuring of the cover pool. This would not only help them to achieve the most efficient collateral pool composition and funding solution, but the model will also quantitatively assess whether under the various scenarios the current CB rating can still be achieved. Finally, the covered bond monitor enables users to view the data and criteria – such as stress assumptions – used by the agency when performing quantitative analysis.
Due to the product’s dynamic nature, the long maturity of CBs and the limited transparency usually available in the market, S&P expects issuers to voluntarily provide a high level of information regarding the credit structure as well as the liquidity and market risks associated with the collateral pool. Additionally, issuers should disclose information about the envisaged development of the risk profile of the collateral pool. This could also include specific self-commitments limiting the risk profile to some extent in certain areas. Indeed, issuers must commit to maintaining the respective risk profile with regard to the cover pool and the asset liability matching and to buffer for risks commensurate with the targeted rating. Such statements are required by S&P to provide ‘AAA’ ratings for CBs and to draw confidence about the long-term stability of the covered bond rating.
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