New Canadian covered bond rules include a requirement that Fitch finds effectively protects
The rules, which Canada Mortgage and Housing Corp. published in the Canadian Registered Covered Bond Programs Guide last month, “require property values to be indexed and caps credit for mortgage loans in cover pools at 80% of the indexed value” in asset coverage test calculations.
“This effectively increases nominal overcollateralization levels when house prices fall,” according to a recent Fitch report.
“Unlike statutory requirements in some other legislative jurisdictions, the guide does not dictate a minimum level of OC that must be maintained. Instead they are set by the issuer, taking into account applicable limits imposed by the primary regulator or other supervisory authority,” Fitch noted.
“However bondholders are likely to have the benefit of ample OC amounts, since break-even OC levels supporting high covered bond ratings are often well-above contractual floors,” the report added.
