Expected Loss Covered Bond Model

APPENDIX C4: USING THE COLLATERAL SCORE IN MOODY’S EL MODEL
The preceding Appendices provide a description in respect of Collateral Score as follows.
• Defining and explaining a Collateral Score.
• Method of calculation and determination of a Collateral Score.
• Haircuts that may be applied to the Collateral Score.
This Appendix and Appendix C5, describe how the Collateral Score, after any haircut if applicable, will impact the
Moody’s EL Model.
The Collateral Score determines, amongst others:
• The level of losses due to the credit deterioration of the assets in the Cover Pool following Issuer Default.
This ignores any losses on the Cover Pool arising from refinancing or market risks. In Moody’s EL Model
these losses will be equal to the Collateral Score, after any haircut if applicable, and are assumed to be
spread equally over the four years following Issuer Default. In scenarios where the Cover Pool is refinanced
prior to the all losses materialising (i.e. within four years following Issuer Default), Moody’s will assume no
value is attributed to an amount of the Cover Pool equal to the amount of the remaining losses (i.e. not yet
written off).
• The refinancing margin assumed for the Cover Pool. The lower the Collateral Score, and thus the stronger
the credit quality of the Cover pool, the lower the assumed cost of refinancing in respect of the remaining
Cover Pool. This is further described in Appendix C5.
The foregoing may be summarised as follows:
Following Issuer Default, the lower the Collateral Score, the lower the write-off for losses against the Cover Pool,
and the lower the refinancing margin applicable to the remaining Cover Pool. A corresponding result arises for
higher Collateral Scores, with higher write-off and refinancing margins.
European Covered Bond Rating Methodology Moody’s Investors Service • 13