1369

Question

It follows from regulation 2015/35/EC article 176 and 214 (1) c) that a reduced stress factor is available for secured bonds (and loans) if there is "no material positive correlation" between the credit quality of the counterparty and the value of the collateral.Is the fact that a bond issuer only owns one asset (typically commercial real estate with tenants on long leases) and that asset serves as collateral to the benefit of bond holders, in itself sufficient to conclude that there is "material positive correlation" between the credit quality of the issuer and the value of the collateral? Or is it necessary to perform a concrete assessment of material correlation on a case by case basis, which include (but is not necessarily limited to) factors such as the terms of the lease contract,  the duration of the lease, the duration of the bond, the creditworthiness of the tenant and other concrete factors?

European Insurance and Occupational Pensions Authority · Accepted Answer

It follows from regulation (EU) 2015/35 article 176 and 214 (1) (c) that a reduced stress factor is available for secured bonds (and loans) if there is "no material positive correlation" between the credit quality of the counterparty and the value of the collateral. If a bond issuer only owns one asset and that asset serves as collateral to the benefit of bond holders, it must be concluded that there is  "material positive correlation" between the credit quality of the issuer and the value of the collateral. This holds also true for e.g. a bond issuer owning only one commercial real estate with tenants on long leases, as the credit quality of the bond issuer will depend on the same factors as the market value of the property, and these will include the factors mentioned by the questioner: location, market prices in the area, contract terms, lease duration, tenant credit quality etc.

1369

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