News on Covered Bonds: Latin America comes debuts with Covered Bonds Issuance

Latin America comes debuts with Covered Bonds Issuance

5th October, 2012: The covered bond market is expanding fast outside its traditional playground – Europe. Panama's Global Bank becomes the first in Latin America to offer USD denominated covered bond. These bonds are the lowest rated covered bonds (Standard & Poors assigned it a "BBB-"[1]) to be sold in the history of U.S markets wherein the cover pool assets are backed by residential mortgages secured by low and middle-income Panamamian citizens. In this deal, the Global Bank corporation is the issuer and the guaranteeing trustee is the HSBC Investment Corporation, a subsidiary of the HSBC Bank (Panama) S.A.

The transaction involves the usual structured covered bond structure, as opposed to legislative covered bond structure, where loans which are to be transferred to a, SPV which in turn guarantees repayment of the bonds.

An effort to sell these bonds were initially made by the issuer sometime in May, 2012 but it did not succeed due to the lower rating of the bonds and may be also due to lack of legislation for covered bonds in Panama. The structure of the program was established mainly under the Panamanian Law and the English Law such that the obligations of the issuer were to be direct and unconditional. The issue size of the transaction was US$200 millions out of its $500 million residential mortgage loans covered bond programme. The default terms were such that in case of failure to redeem the bonds in time the maturity period of the bonds would increase by 12 months automatically and the issuer would be allowed to make further issues in the market with the proper approval of a credit rating agency.

However, the program failed to draw attention of the investors resulting in its failure and then it had to be postponed.

Global Bank recently made another attempt to come out with the same scheme in October this year with certain modifications to the portfolio of mortgage loans backing the issue for the programme to be acceptable in the market. The principal balance of the mortgage portfolio was increased to $241 million from $212 million; the number of loans in the pool were also increased to 3,928 from 3,601. After initial difficulties, it could successfully launch the program in the US market and grab investors. The coupon rate was fixed at 4.75%.  

[Reported by: Piyush Sinha]

[1] For further details, the rating report of Standard & Poors can be viewed here