Market hopes KA Finanz has hit bottom

The technically Aa3-rated euro covered bonds of Kommunalkredit, now under the stewardship of KA Finanz, have widened from mid-swaps flat to 50bp this week as forced selling followed speculation that the rating contract with Moody’s could be void. But, in light of the support that covered bond ratings of wind down entities have historically enjoyed, there is a hope that Austria will see the sense in supporting the covered bond rating. However analysts warn that the bonds still face substantial risks.