Expected Loss Covered Bond Model

APPENDIX D1: REFINANCING RISK – THE REFINANCING MARGINS
Under Moody’s EL Model, determination of refinancing margins will take into account the following considerations,
amongst others:
• The time period available for completion of the refinancing. Higher refinancing margins are assumed in the
Moody’s EL Model, if the time period to complete refinance is six months or less. This may arise in case of
Issuer Default within a period of six months of the legal final maturity of any Covered Bonds.
• The time period between the time of issue of a Covered Bond and the time of refinancing. The shorter the
time period (or closer the time of refinancing is to the time of issuance), the greater certainty in respect of
refinancing margins required to refinance the Cover Pool.
• The Collateral Score, and more generally the credit quality of the Cover Pool. In general it may be
concluded that all else being equal, a lower Collateral Score (and the lower the Collateral Score the higher
the credit quality of the assets) will lead to lower refinancing margins.
• The type of collateral in the Cover Pool. In Moody’s experience and as shown in historical data, certain
types of collateral in the Cover Pool will trade at lower refinancing margins than others, under similar
trading conditions and circumstances. Examples may include ‘repo-eligible’ collateral (often included
within Cover Pools made up mainly of public sector obligations), in respect of which the Moody’s EL
Model may assume a refinancing margin of zero.
• Legislation and contractual-specific considerations. For those jurisdictions where the legislation is
more/less supportive than others of the process of sale of collateral in the Cover Pool following Issuer
Default (i.e. presenting obstacles to any refinancing), refinancing margins may be correspondingly
lowered/increased. Similar consequences may be considered in circumstances of contractual-specific
provisions that have a similar effect.
Refinancing required to be completed within a short time period (six months)
The following data represents examples of refinancing margins (in basis points) which may be applied in the
Moody’s EL Model if refinancing is required to be completed within a time period of six months.
Refinancing Margins (in bps)
Residential
Mortgages*
Commercial
Mortgages
Public Sector
Loans**
1 73 108 27
2 79 105 32
3 86 117 36
4 91 126 39
5 95 133 41
* these are examples of refinancing margins that may apply for prime residential mortgages
** these are examples of refinancing margins that may apply for ‘non-repo eligible’ public
Years
The following may be considered in respect of the above data.
• The three columns represent the three most prominent collateral types found in Cover Pools.
• The rows refer to the time period in years from the time of issuance of Covered Bonds to Issuer Default.
By way of example from the data, consider the following scenarios and conclusions:
• In circumstances of an Issuer Default that occurs five or more years after issue of Covered Bonds,
Moody’s EL Model will apply a refinancing margin at the time of Issuer Default to the Cover Pool of
residential mortgages in an amount of around 95 basis points.
• In circumstances of an Issuer Default which occurs two years after issue of Covered Bonds, Moody’s EL
Model will apply a refinancing margin at the time of Issuer Default to the Cover Pool of residential
mortgages in an amount of 79 basis points.
As described at the top of this appendix refinancing margins will be different from deal to deal and jurisdiction to
jurisdiction.
European Covered Bond Rating Methodology Moody’s Investors Service • 15