Moody's: Asian covered bond markets will continue to develop

Moody's Investors Service says that covered bond markets in Singapore and Korea will continue to develop, while other such markets may also emerge over time in other Asian economies, such as Malaysia, Thailand, Hong Kong and India.

"More banks in both Singapore and Korea may establish new covered bond programs in 2016 to diversify their sources of funds," says Joe Wong, a Moody's Assistant Vice President -- Analyst. "For other economies, a covered bond-specific legal framework is an important consideration for prospective issuers."

Covered bonds were issued in Singapore for the first time in 2015, while in Korea, the first covered bond program under the Korean Covered Bonds Act was established in 2015.

In economies such as Malaysia, Thailand, Hong Kong and India, which do not currently have covered bond-specific legal frameworks, market development may take a longer time.

"While covered bond-specific legal frameworks can be credit positive for such securities, the lack of such frameworks in itself does not preclude us from assigning ratings to covered bonds," says Ning Loh, a Moody's Vice President -- Senior Credit Officer / Manager. "Without a legal framework, we can still assess the segregation of the cover pool and the strength of other protections based on contractual and securitization techniques."

The Moody's report highlights feedback received from meetings with market participants at a forum in Singapore on 8 and 9 March, where the development of covered bonds in Asia and Europe was discussed.

The report also notes that Asian covered bonds are typically denominated in foreign currency, mainly USD, while cover pool assets are typically denominated in domestic currencies.

In assessing covered bonds, Moody's analyses the cross-currency swaps used to mitigate the currency mismatch between the local currency denominated cover pool and the foreign currency denominated covered bonds.

In Korea, foreign currency covered bonds may have structural features to mitigate the effect of exchange controls, which allow Moody's to rate the covered bonds at Aaa -- a rating level higher than the foreign currency bond ceiling of Aa1 for Korea.

The report also discusses conditional pass-through covered bonds, which are becoming more common in some markets.

Moody's believes conditional pass-through structures can mitigate refinancing risk, which is particularly relevant in countries that do not have liquid secondary mortgage markets, as is the case in some Asian economies, such as Singapore and Korea.

With a conditional pass-through structure, issuers can avoid the need to sell large portions of the cover pool in a short time to repay the maturing covered bonds, a process that could result in lower prices being obtained for cover pool assets.

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