The new regulatory framework for covered bonds in Canada is investor friendly, but the resulting issues will be riskier, says Moody's Investors Service in a new report.
The rating agency says that, despite robust oversight and disclosure requirements, new guidelines from the Canada Mortgage and Housing Corp. (CMHC) will result in greater credit risk for new covered-bond programs because they prohibit the inclusion of insured mortgages and cash as eligible assets.
"Credit risk will be higher in new programs than in existing programs, which are backed by government-insured mortgages," says Todd Swanson, a Moody's analyst, "because the law will prohibit having insured mortgages as collateral or cash as an eligible asset in new programs."
"Still, the guidelines do have positive features for investors," he adds. Moody's notes that the new guidelines require disclosure of detailed cover pool data, compliance with a comprehensive set of tests to protect against credit risks, and an independent monitor to oversee compliance with collateral requirements.
In addition, as the covered bond regulator, CMHC's mandate to promote a healthy housing market aligns with the interests of covered bond investors, Moody's says, noting this is another positive.