Moody's Investors Service is proposing changes to its global approach to rating covered bonds in light of proposed changes to its global bank methodology including the introduction of a new bank counterparty risk (CR) rating.

The CR rating, if adopted, would represent Moody's opinion on the probability of default on certain senior bank obligations and other contractual commitments.

If Moody's adopts the CR rating for covered bonds we expect that more covered bond ratings will be positively affected than negatively affected, however while banking methodology changes are pending Moody's is not in a position to fully assess and disclose the exact impact of proposed changes to our methodology on specific outstanding covered bonds.

In a request for comment (RFC) titled "Update to Covered Bond Methodology Resulting from New Counterparty Risk Measure" Moody's proposes to use the CR rating as the basis for the covered bond anchor (CB anchor). The CB anchor reflects the probability that the issuer (or another entity in the issuer group that supports the issuer) ceases to make payments under the covered bonds.

Currently, the CB anchor is typically the issuer's senior unsecured rating (SUR) plus up to one notch depending on the level of bail-in-able debt each institution has issued. In this RFC Moody's proposes to change the CB anchor to the CR rating plus one notch for the majority of covered bonds in Europe and to the CR rating for other covered bonds.

In order to ensure that covered bond rating decisions reflect all relevant information Moody's may choose to leave on review ratings potentially affected by downgrades of bank SURs and/or BCAs during the RFC period, pending the finalisation of the new methodology.

Moody's is seeking market feedback on its proposed structured finance rating methodology updates by 9 February 2015 and will adopt and publish updated credit rating methodologies following appropriate consideration of any comments it receives.

Market participants should submit their comments on the Request for Comment page on moodys.com, a statement said. – TradeArabia News Service