Library picture: Windmills near Trier, 13 May 2015. Photo credit: fidepus (CC BY-SA 2.0)
The credit ratings agency Moody’s has published a report on the grand duchy’s draft legal framework that would enable Luxembourg banks to issue covered bonds backed by renewable energy assets.
According to the Moody’s report, issued on Tuesday 13 March, the new framework “will allow green projects to be funded with recourse to both issuers and a dedicated cover pool of assets”. This “contrasts with the dominant type of green bonds issued to date, where recourse is either to the issuer on an unsecured basis or to a dedicated asset pool.”
The draft also contains features which mitigate the credit risks associated with the collateral including: eligibility criteria for the renewable energy infrastructure financings (REIFs) assets that can be included in cover pools; leverage limits that restrict the amount of covered bonds that can be issued against the REIFs; minimum over-collateralisation requirements and a 180-day liquidity buffer requirement to reduce liquidity risk.
It does not address other credit risks, such as set-off rights and interest rate and currency risk, and does not require further collateral to be added to cover pools if REIF assets become non-performing.
“REIFs pose different credit risks than traditional covered bond assets because of the variability of renewable energy generation, the possibility for changes to government subsidies, technological risks, and the relatively illiquid nature of the assets,” stated Christopher Bredholt of Moody’s.