The supplemental liquidity reserve amount (SLRA) held is 5% of the cover pool otherwise required under the asset cover test and can only be used by the guarantor of the covered bonds to raise funds to meet obligations as they become due, and only to the extent that other available funds are insufficient, said Fitch.
ING’s programme already featured a selected asset required amount (SARA) clause, which limits the amount of assets that can be sold to repay a given series to the latter’s pro-rata share of the cover pool. A SARA clause results in higher overcollateralisation being necessary for a given rating than for programmes without such a clause.
The strength of the SARA clause is that it helps mitigate time subordination risk, Arjen Wink, director at Fitch, told The Cover.
“A SLRA is an efficient way of using assets as it interacts with the SARA clause, and results in ING posting less collateral than comparable programmes that do not have an SLRA,” he said.
The introduction of the SLRA leads to a lower overcollateralisation level than were it not included, said Fitch in its statement on ING’s programme changes.
“The 5% SLRA increases the supporting asset percentage by more than 5% because it allows the earmarked assets to be used to repay the series that require the most OC,” said the agency.
“In line with the pro-rata principle, the SLRA also removes the need to post excess OC for later series, where Fitch does not expect it will be needed,” it added.
The asset percentage supporting ING’s covered bonds’ AAA rating is 90.4%. That compares to 77%, 75.7% and 78.9% for SNS’s, ABN Amro’s and NIBC’s covered bonds, respectively.
Fitch rates ING’s covered bonds AAA. The rating is based on an A+ issuer default rating and a Discontinuity Factor (D-Factor) of 16.2%, which together lead to a probability of default rating of AA+. The rating agency expects high recoveries, and has therefore assigned a one notch uplift, which takes the rating to AAA.
ING’s covered bond rating is no longer under analysis, where it was placed on 7 July pending the implementation of Fitch’s updated criteria on the treatment of liquidity risk in covered bonds.