Moody's Investors Services said in a report published Tuesday that an early repayment scheme approved by Hungary's Parliament a week earlier sets a "worrying precedent".
Under the scheme, to start Thursday, Hungarians may repay their foreign currency-denominated mortgage loans in full at an exchange rate discounted from the market rate. Banks are to cover the cost of the discount.
The scheme "is credit negative for covered bonds" because it reduces the value of mortgage loans in cover pools and may also lead to "event risk" whereby actual or potential future legal changes need to be factored into assessments of collateral value, Moody's said.
"This will particularly impact refinancing risk if it reduces the future sale value of the mortgage loans," said Patrick Widmayer, Moody's AVP analyst -- Covered Bonds. "The perception that such changes are now more likely may be enough to increase the risk premium on these assets as market participants become concerned that future changes in law may impact the value of the assets." He explained that this may make it more difficult and expensive to raise cash against the assets in the cover pool to repay outstanding covered bonds.
"The law change may also increase the risk of currency mismatches following issuer default and negatively impact bank credit quality by exposing banks to additional capital costs," Widmayer added.