Expected Loss Covered Bond Model

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APPENDIX B1: MODELLING THE CREDIT STRENGTH OF THE ISSUER Moody’s EL Model will take into account various Issuer or Issuer group-related benefits when rating Covered Bonds. The following may be considered in this respect. • The minimum rating that a Covered Bond should achieve is equivalent to the senior unsecured rating of the Issuer. Moody’s EL Model calculates the probability of Issuer Default during the life of the covered bond, and assumes prior to Issuer Default that where the Issuer performs these obligations throughout the life of the Covered Bond, there will be no loss to investors. The way this benefit is incorporated into the Moody’s EL Model is discussed in Appendix A1. The relative contribution of this strength versus the value of the Cover Pool is analysed in Appendix A2. • One of the key inputs into Moody’s EL Model is the credit quality of the Cover Pool. The Cover Pool credit quality will be assessed as part of Moody’s analysis, and a score (“Collateral Score”) calculated and determined based on a number of assumptions and considerations. For a more detailed description of the determination and meaning of the Collateral Score, see Appendix C1 below. In particular circumstances and under certain conditions, the Collateral Score may be reduced for an issuance of Covered Bonds – and this is related to the rating of an Issuer and the extent to which the performance of the Issuer is correlated with the performance of the Cover Pool. A further description of this potential reduction of collateral stress and the corresponding haircut to the Collateral Score are set out in Appendices C2 and C3. • Under Moody’s EL Model, loss following Issuer Default will take into account, amongst other considerations, any full-recourse unsecured outstanding claim against the Issuer (and, if relevant, other group companies, or guarantors), if applicable. This claim will be assumed to follow after any realisation of the Cover Pool. In those instances where the issuer may be part of a larger financial group or the covered bond issuance activity is only part of the activities of the Issuer, under Moody’s EL Model, this unsecured claim may reduce losses by up to 45%. 8 • Moody’s Investors Service European Covered Bond Rating Methodology
APPENDIX C1: DEFINING AND CALCULATING THE COLLATERAL SCORE One of the key inputs into Moody’s EL Model is the credit quality of the Cover Pool. The Cover Pool credit quality will be assessed as part of Moody’s analysis, and a score (“Collateral Score”) calculated and determined based on a number of assumptions and considerations. The better is the credit quality of the Cover Pool, the lower will be the Collateral Score. The Collateral Score is calculated by Moody’s using techniques routinely used in structured finance transactions. The method of calculation will vary depending on the type of collateral in the Cover Pool, and also the jurisdiction or market in which it is located. 8 The Collateral Score can be seen as a representation of how much risk-free credit enhancement may be required to protect the Aaa rating of the Covered Bonds against a credit deterioration of the assets in the Cover Pool. Limiting the analysis to the credit deterioration of the assets in the Cover Pool means that: • There is no support from Issuer and Issuer group; • No forced sale is required to make timely payments on the Covered Bonds (i.e. the assets in the Cover Pool are allowed to amortise naturally over their term); and • There are no market risks between assets and liabilities (i.e. no mismatches between the underlying collateral in the Cover Pool and the Covered Bonds). So, for example, assuming that the risk-free credit enhancement required for such a Cover Pool to achieve a Aaa rating is 5%, the Collateral Score would be 5%. The higher the credit quality of the Cover Pool, the lower the riskfree enhancement required to protect against a credit deterioration of the assets and therefore the lower the Collateral Score. The rank-ordering of Collateral Scores between different asset types will typically be as follows (ranging from Collateral Scores of highest credit quality to lowest credit quality). • Public sector obligations. • Residential mortgages. • Commercial mortgages. However: • Cover Pools made up of high-quality residential mortgages may have a Collateral Score which is lower than that for a Cover Pool made up of public sector obligations; and • Cover Pools made up of high-quality commercial mortgages may have a Collateral Score which is lower than that for a Cover Pool of residential mortgages. Each transaction and asset type (and, where applicable, each jurisdiction and market) will be considered on its own merits and a Collateral Score determined accordingly. 8 Moody’s has published a number of methodology reports covering residential and commercial mortgages, and collateralised debt obligations. European Covered Bond Rating Methodology Moody’s Investors Service • 9
Page 1 and 2: STRUCTURED FINANCE/BANKING RATING M
Page 3 and 4: Within the Moody’s EL Model, the
Page 5 and 6: APPENDIX A1: THE JOINT DEFAULT APPR
Page 7: APPENDIX A2: THE RELATIVE CONTRIBUT
Page 11 and 12: APPENDIX C3: CALCULATION OF THE HAI
Page 13 and 14: APPENDIX C4: USING THE COLLATERAL S
Page 15 and 16: APPENDIX D1: REFINANCING RISK - THE
Page 17 and 18: APPENDIX D2: REFINANCING RISK - THE
Page 19 and 20: APPENDIX D4: SIMPLIFIED EXAMPLE TO
Page 21 and 22: APPENDIX E2: MARKET RISKS - MOODY
Page 23 and 24: APPENDIX E4: MARKET RISKS - CALCULA
Page 25 and 26: APPENDIX E5: SIMPLIFIED EXAMPLE TO
Page 27 and 28: APPENDIX F2: RATING A PROGRAMME: TH
Page 29 and 30: APPENDIX F4: PROBABILITY OF DEFAULT

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