Moody's: ECB's changes to covered bond haircuts will increase CPT issuers' repo funding costs

Changes to the haircuts that the European Central Bank (ECB) applies to covered bonds posted by their issuers as collateral in repo transactions will increase the cost of repo funding for issuers of conditional pass-through (CPT) covered bonds, Moody's Investors Service said in a report today.

The report, "Covered bonds -- Europe: Higher haircuts will increase repo funding costs for CPT issuers; signal ECB's focus on extension risk", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Changes to the haircuts that the ECB applies to own-use covered bonds will increase the costs of ECB repo funding for issuers of CPT covered bonds," said John Hogan, a Moody's Vice President -- Senior Analyst and the report's author. "The cost increases will be higher for non-investment grade issuers than investment grade issuers, although the impact on overall funding costs will likely be limited."

The haircuts applied to own-use CPT covered bonds under the revised ECB rules are materially higher than the haircuts for own-use hard- and soft-bullet covered bonds with the same scheduled maturity.

"The higher haircuts signal that the ECB is focused on the risk of losses on repo funding it provides against own-use CPT covered bonds if the market value of the bonds falls because their maturity date is extended," said Martin Lenhard, a Moody's Vice President -- Senior Credit Officer and a co-author of the report.

The increase in repo haircuts follows the exclusion of CPT covered bonds issued by non-investment grade issuers from the ECB's asset purchase programme from 1 February.