“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 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.
“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.