CHB Champion Enterprises,

Chelsea Building Society is in talks with the Bank of England regarding its use of the Special Liquidity Scheme, or SLS, a spokeswoman said Monday.

The talks follow Moody's Investors Service downgrade of Chelsea Building Society's covered bonds to Aa3 from Aaa.

The spokeswoman said the talks were part of its continuous discussions with the BOE, with which it regularly discusses its funding and liquidity position.

Covered bonds are highly rated bonds that are serviced with the payments made on a pool of credit assets, such as residential mortgages or public-sector loans, which comply with a minimum legal standard and remain on the lender's balance sheet.

Several U.K. building societies set up covered bond programs last year, after the BOE said it would swap them for U.K. treasury bills at the SLS.

However, the covered bonds must be rated triple-A for use at the scheme.

Moody's originally rated Chelsea Building Society's covered bonds Aaa in October last year, but downgraded them last week, after the building society itself was downgraded.

Chelsea Building Society is one of several U.K. building societies that has had its bank financial strength ratings cut by Moody's last week. The agency has put its Aaa ratings on covered bonds issued by seven other U.K. building societies on review for downgrade as a result of the cuts to the issuers' ratings.

The spokeswoman said Chelsea Building Society was still in dialog with Moody's in order to better understand the rationale behind the downgrade.

-By Mark Brown, Dow Jones Newswires; +44 (0)207 842 9485, mark.brown@dowjones.com

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