United States

Moody's yesterday (Monday) cut Washington Mutual's covered bond rating from A3 to Baa1, and left it on watch negative, in an unexpectedly swift follow-up on last week's downgrade of the instruments from A2 to A3.

At a Washington conference on Friday representatives of the Department of Treasury, Congress and potential issuers tackled some of the questions that covered bonds must answer convincingly if they are to take hold among mortgage lenders and investors in the US. And while the Treasury made clear its opinion that the product’s time has come, it was by no means clear that their long term future is assured.

Moody’s yesterday (Thursday) downgraded WaMu’s covered bond ratings from A2 to A3.

Standard & Poor’s last (Monday) night cut the rating of Washington Mutual Bank (WMB) from BBB to BBB-, and Washington Mutual Inc from BBB- to BB-. The downgrade follows Moody’s downgrade of WMB, the sponsor bank of WaMu’s covered bond programme, from Baa2 to Baa3 last Thursday.

The House Financial Services Committee is set to hold hearings into covered bonds next year, according to sources in Washington, with momentum behind the product in the US having been given renewed impetus by the bailout of Fannie Mae and Freddie Mac.

Fitch last night (Thursday) downgraded Washington Mutual’s covered bond programme by two notches, from AAA to AA. The bonds have now been removed from Rating Watch Negative, with WaMu having set a new minimum overcollateralisation level.

Those seeking a simpler structure under which US banks will be able to issue covered bonds directly are confident that a template is nearing completion. However, the end result could be one that continues to differ from European models.

In brief: George Soros calls for the introduction of covered bonds based on Denmark’s traditional balance principle in an article in the Financial Times today (Tuesday).

The four US banks setting up covered bond programmes in accordance with the Treasury’s recent guidance are understood to have formed a joint working group to examine the best possible structure. Direct issuance is being targeted, as this is seen as having the best chance of attracting US investors to covered bonds.

The Treasury was flanked by key regulators and issuers when it released its Best Practices template for US covered bonds last week. The Cover asked representatives of other parts of the market what impact the authorities’ moves were likely to have on the development of the market.

A bill put forward by Republican congressman Scott Garrett is seeking to wrest control of key elements of a US covered bond framework away from the Federal Deposit Insurance Corporation and give issuers more flexibility to use the product, while tightening key investor protections.

Here is the US Treasury’s summary of its Best Practices. Covered bonds must comply with these to be consistent with the Treasury’s guidelines, which are included in full in its Best Practices Guide.