News on Covered Bonds: Covered Bonds not risk free – S&P Covered Bond Ratings Director speaks

/in /by

Covered Bonds not risk free – S&P Covered Bond Ratings Director speaks

 

15th August, 2011: Covered Bonds recently have been well received by investors and have seemingly gained a high profile with issuers and investors. Standard & Poor's Director Sabrina Miehs, of the Covered Bond Ratings Group, on Credit Matters show, discussed the wide range of collateral types and diverse risks underlying different covered bond programs.

Some of the risks attached to covered bonds are, the asset type in the pool, jurisdiction in which they are issued, structural risk, asset liability mismatches, counterparty risk and over-collateralisation in the pool and so on.  The methodology adopted by S&P for rating such covered bonds is typically looking at the cashflows from the underlying assets, the timely and full payment of interest and principal and the loan pools backing the covered bonds are monitored on a regular basis, whereas other rating agencies approach is looking at the sum of expected losses, ALM, interest rate risk and foreign exchange risk.

Further she mentioned that the general misnotion is that the issuer downgrading would impact the rating of covered bonds as well however issuer downgrading may or may not be affecting the rating of the covered bonds at all. It is also believed that covered bonds are vanilla products and are almost risk-free.  The view however is incorrect as there lot of credit risks attached to the product.

(Reported by: Nidhi Bothra)

News on Covered Bonds: Australia introduces Covered Bonds legislation

/in /by

Australia introduces Covered Bonds legislation

 

15th September, 2011: Banking Amendment (Covered Bonds) Bill, 2011 has been introduced today by Treasurer Wayne Swan to the House of Representatives, Australia to amend the Banking Act, 1959 facilitating financial institutions to issue covered bonds and is expected to generate a sale of A4130 billion in coming years. The exposure draft of the bill was issued in April, 2011 (see our news on the subject here).

The bill includes a regulatory cap on the amount of covered bonds an institution can issue, with the pool of assets used to secure issuance no greater than 8 percent of an institution's assets. The cap shall limit the claim of the covered bondholders over the assets of the depository institutions protecting the claims of the unsecured creditors such as depositors arising from the preferred claim of covered bondholders over the assets of ADIs. The eligible assets to form a part of the cover pool are high quality assets such as residential mortgages and the value of the assets in the cover pool should be 103% of the value of the outstanding covered bonds.

There have been concerns over offshore entities issuing covered bonds in Australia and tapping on the savings while the banks tried to deal with the global financial turmoil. The legislation is expected to reduce the dependence of banks on overseas funding markets, provide alternative and cheaper means of accessing funds and diversifying funding base.

Both houses are expected to pass the law by the year end. The text of the bill is available here.

[Reported by: Nidhi Bothra]

News on Covered Bonds: MAS proposes Covered Bonds Rules for Singapore

/in /by

MAS proposes Covered Bonds Rules for Singapore

 

5th April, 2012: Following the league of USA, UK, Australia, Canada, New Zealand and others countries, Monetary Authority of Singapore recently came out with a “Consultation Paper on “Covered Bond Issuance by Banks Incorporated in Singapore” on 9th March 2012 (see the text of the consultation paper here) and is open for public comments till 10th April, 2012.

 Some of the key issues considered in the proposed rules are:

  • The aggregate value of assets in cover pools for all covered bonds issued by the bank, not to exceed 2% of the value of the total assets of the bank, at all times.

  • A loan to value limit of 80% is applicable to residential mortgage loans. Even if the LTV Limit exceeds 80%, the value of the loan for the purpose of determining the value of the loan as an asset to be part of the cover pool shall be reduced by the amount of the excess if the loan is to be included in the cover pool.

  • Covered Bonds shall not be issued through foreign incorporated entities.

  • Qualifying cover assets to include

o   Residential mortgage loans that are mortgage loans secured by residential property.

o   Derivatives held for the purpose of hedging risk arising from covered bonds issuance.

·         Minimum over collateralization to the extent of 3% of the cover pool

·         Appointment of a third party cover pool monitor

The rules pertain to providing protection to the investors in areas of quality covered areas, specifying minimum over-collateralization levels, a requirement for ongoing monitoring of risk but have not mentioned anything about legal protection to the bondholders in case of bankruptcy/ default of the issuer. The proposed Rules specifically rule out the segregation of the cover pool from the bankruptcy estate of the defaulting issuer and it states that it would depend on the existing legal regime. Unlike, similar Consultation document on Covered bonds, one such, issued by Reserve Bank of New Zealand, wherein the regulators propose “carve-out” of registered issues of covered bonds from specific parts of the statutory management and liquidation regimes which are in our view, would explicitly protect the covered bondholders rather having to rely or fall back on existing common laws.

[Reported by: Sikha Bansal; Abhijit Nagee]

News on Covered Bonds: Covered Bonds Rules in Canada

/in /by

Covered Bonds Rules in Canada

 

30th April, 2012: Covered Bonds rules have been introduced in the Budget Bill, 2012 in Canada. Under the Covered Bonds rules, banks will be prohibited from using insured mortgages to back covered bonds. According to the Finance Minister the move will strengthen the housing market, which has seen housing prices in some of the Canadian cities rally in the recent times.

The move will result in increase in the borrowing costs and mortgage rates and curbing the housing market. While in hunky dory times uninsured mortgages may be lesser default category than those insured, in case of stressed market scenario, these assets would have a high default risk. Further, in absence of secondary market, liquidity for these uninsured mortgages would be a high risk. Over collateralization levels in case of uninsured mortgage cover pools is higher than those of insured mortgages. However, the legislation provides a cap of 10% on over collateralization, also capping the covered bonds ratings that issuers might target.

The legislation requires government to set up a registry for financial institutions to register themselves as issuers of Covered Bonds.

Mortgage insurance had become a huge burden for the taxpayers as government was providing 100% guarantee on Canada Mortgage and Housing Corporation (CMHC) insured mortgages and 90% guarantee on privately insured loans; these have also been the prime reasons for banks adopting lax underwriting standards while giving out housing loans. Absence of government guarantees will ensure that the banks assess the risks properly before providing home loans regulate the housing market.

Recently, Monetary Authority of Singapore had also proposed covered bond rules. (See our news here)

[Reported by: Nidhi Bothra]

News on Covered Bonds: Covered Bonds-Alternative Funding Tool in the Turkish Housing Market

/in /by

Covered Bonds-Alternative Funding Tool in the Turkish Housing Market

 

11th June, 2012: According to a recent report by S&P, Covered Bonds can play a major role in funding the housing market boom in Turkey. Despite having a law dealing with covered bonds, the covered bonds market in Turkey is completely untapped and till date the only covered bond issuances that have taken place have been backed by SME loans. The first and the only RMBS transaction till date was by Turkey�s Sekerbank � a mid-sized lender that focused on SME business and had come up with Turkey�s first covered bonds issuance last year sometime in July. (See our news segment on this transaction here)     

With a GDP growth of over 8% in 2011, the demand for housing in Turkey has exceeded the supply and the homeownership rates in Turkey are higher than in any other European countries. In such a scenario Turkish banks would have to find ways to fund the housing demand and there is quite a possibility that banks with growing mortgage portfolios would favour more long-term funding options such as with covered bonds.

In a recent TV segment, Standard & Poor�s Director Sabrina Miehs discussed the trends in Turkish covered bonds market stating that if S & P were to rate covered bonds in Turkey, it would probably use its covered bond rating criteria as the starting point and would give a maximum uplift of 5 notches above the issuer�s rating as the number of refinancing options available to the portfolio manager in a typical transaction would be quiet broad and the systematic importance would not be that high as the country is very new in these types of issuances. She also stated that the main features that would be considered for rating covered bonds in Turkey would be the – timely payment of interest and payment, asset liability mismatch risk, liquidity risk, credit risk, cash flows, market risk, counter party risk and country risk which is an important feature in case of turkey.  With the growth in the housing market, the covered bonds markets is likely to emerge sooner as the funding cost would be lower than those for traditional funding and moreover the presence of a covered bond legislation provides a solid structure for the issuance of covered bond in Turkey.

[Reported by Abhijit Nagee]

 

 

News on Covered Bonds: Belgium likely to have Covered Bond legislation by the end of 2012

/in /by

Belgium likely to have Covered Bond legislation by the end of 2012

 

14th July, 2012: Draft Covered Bonds legislation that was introduced by the National Bank of Belgium ("NBB") in 2011 is most likely to be approved by the Belgian Parliament in October, 2012, making another European Country with a dedicated legislative framework for issuance of Covered Bonds.

 The draft law is based on the German Pfandbrief model with the only difference that it is more elaborate as far as deal structures are concerned as it incorporates additional structural features having a European legislative approach to documentation.

The new regulatory framework, once approved, would be extremely beneficial for the relatively inactive Belgium Banks providing them with an alternate and cost-effective funding source thus helping Belgium to be at par with the rest of Western Europe.

Signs of market revival can already be seen as two famous Belgian banks Dexia Banque Belgium, the 100% state-owned Bank and KBC are ready to issue [1] covered bonds benchmarks backed by strongly performing prime residential Belgian mortgage in January right after the regulatory framework is in place.

Key features of the upcoming legislation:

  • Issuer Structure: Only Universal Credit Institutions with special license obtained from NBB would qualify as eligible issuers who would own the cover pool. The bondholders would have direct recourse to the credit institution this make the legislation very even more significant.

  • Framework: The bonds would be governed by special covered bond legislation and a specific legal framework superseding the general insolvency laws which would provide cushioning against the bankruptcy of the issuer of covered bonds.

  • Cover Assets: The cover pool can be composed of assets forming part of the following categories:

  • Mortgage loans;

  • Group Originated Senior mortgage securities

  • Exposures to credit Institutions

  • Exposures to Public Sector entities and/or senior public sector ABS

For details on eligibility criteria of each type of asset class click here

  • Valuation of the mortgage cover pool and LTV criteria: Loan to Value (�LTV�) would be calculated on the market value of the bonds. The LTV limits used for calculating collateralisation rates for the cover pool would be 80% for residential mortgages and 60% for commercial mortgages. Further there is no additional LTV limit on a portfolio basis and the bond holders would get the benefit of that portion of the loan that exceeds the LTV cap.

  • Asset-Liability Guidelines: The draft legislation states that the issuer would need to manage its interest and currency risk exposure for each covered bond program and would also need to comply with the liquidity test. The draft legislation also provides for a number of asset cover tests with coverage calculations on a monthly basis. It mandates the value of the cover assets to exceed the minimum overcollateralization levels of 5% at all times. The draft does not make any mention about the stress test scenarios and their frequency but states the grace period of 14 days in case of a breach of liquidity risk mitigants. Maintenance of coverage tests would be the responsibility of the Supervisory authority and/or Trustee/Cover pool monitor.

  • Cover Pool monitor & Banking Supervision: The cover pool monitor would be an entity independent from the issuer and covered bond issuers would require a special license of additional requirements compared to general banking supervision regulations. The cover pool monitor would perform reporting obligations and ensure compliance with legal and regulatory requirements.

The Belgium Covered Bond regulatory framework, once approved in the Parliament would provide the Belgian Credit Institutions an important funding instrument. The framework seems very robust and market revival is expected sooner, but there might be deviations in the final framework from the draft as it stands today.

 

[Reported by Abhijit Nagee]

___________________________________________________________________________________

[1] As reported in Euroweek : http://www.euroweek.com/Article/3046988/Channel/2007/First-Belgian-covered-bonds-due-in-January-as-domestic-law-nears.html?eventcookielogin=Login&cookielogin=1

 

 

News on Covered Bonds: Australia joins the league: APS 121 and Response Paper on Covered bond & Securitisation released by APRA

/in /by

Australia joins the league: APS 121 and Response Paper on Covered bond & Securitisation released by APRA

 

25th July, 2012: The year 2012 witnesses yet another State in the league to have issued formal rules for Covered Bonds issuance. This time it's Australia. The Australian Prudential Regulation Authority ("APRA") has issued a Response Paper on Covered Bonds and Securitisation matters dated 12th July, 2012 along with the Prudential Standard APS 121 Covered Bonds for issue of covered bonds by authorised deposit taking institutions ("ADI"). The response paper observes the comments and responses received from various industry participants to the discussion paper that APRA had issued last year in November and sets out its responses/views to the issues raised during these consultations with various industry participants. Whereas the Prudential Standard APS 121 (the Standard) outlines the practices to be observed by ADIs in the course of issuing covered bonds. The Standard also underlines the principles to be followed by ADIs to manage risk associated with exposure to a covered bond special purpose vehicle ("SPV").

Background     

The APRA released a discussion paper – "Covered Bonds and Securitisation matters" and draft prudential standard – "Prudential Standard APS 121 Covered Bonds (APS 121)", on 8th November, 2011.  

These documents set out APRA's proposal to ensure that ADIs adopt prudent practices while issuing covered bonds. The discussion paper outlined the then proposed changes to APRA's prudential standards and was open for written public submissions pending 9th December, 2011. Further, pursuant to the amendment made in the Banking Act, 1959 to give effect to the Covered Bonds Act so to allow ADIs to issue covered bonds, APRA had amended the Prudential Standard APS 120 Securitisation ("APS 120") to remove the prohibition on ADIs issuing covered bonds. Hence the draft stated APRA's proposals to introduce a new prudential standard and make amendments to existing prudential standards in relation to requirements for ADIs that issue covered bonds. This change in APS 120 was related to the capital treatment of subordinated tranches of securitisations issued by another entity.

 

Response Paper issued – APRA's response on holdings of subordinated tranches of non-originated securitisations

Subordinate tranches: The discussion paper issued by APRA in November 2011 defines subordinate tranches as "any tranche of a securitisation that is exposed to the bottom 10 per cent of the initial capital structure, unless that tranche is also the most senior"

On several submissions and arguments received to the discussion paper regarding the definition of subordinate tranches APRA ("Regulatory Authority") states that over-reliance on assessments by credit rating agencies in relation to risks associated with securitisation structures always has a risk as already demonstrated during the global financial crisis. The Regulatory Authority therefore is keen on adopting the crystal clear and simple definition proposed in the discussion paper. As far as straddling tranches are concerned, it intends that any tranche that is exposed to the bottom 10 per cent of a securitisation's initial capital structure should be deducted unless it is the most senior.

APRA proposes amendments to APS 120 to require ADIs to deduct holdings of subordinated tranches of non-originated securitisations from their regulatory capital. It intends to amend APS 120 so that these changes can take effect from 1st January, 2013.

Prudential Standard APS 121 – Covered bonds

APRA has finally released new Prudential Standard – APS 121 ("Standard") for issuance of covered bond by ADIs.  APS 121 is made under section 11AF of the Banking Act 1959 (Banking Act) and applies to all ADIs, other than foreign ADI.

The Standard 121 explicitly states that a covered bond is not securitisation for the purposes of APS 120 and that APS 120 does not apply to covered bonds.

Requirements with regard to SPV- The standard mandates proper legal documented terms between the issuing ADI, covered bond SPV and covered bond holders setting out crystal clear rights and obligations amongst all the parties to the transaction.

Assets in the cover pool – While determining whether an asset is a part of the cover pool, an issuing ADI must have regard to the priority of claims and the following shall be duly considered by the issuing ADI:

  1. Deduct the aggregate amount of assets in the cover pool that do not qualify for treatment as assets of the ADI from the Common Equity Tier 1 Capital.

  2. Assets in cover pool that qualify for treatment as assets of the issuing ADI shall be treated as if they were held directly by the ADI.

APS 121 is exhaustive and states detailed provisions with regard to assets outside the cover pool and liabilities between the ADI and covered bond SPV. It would go a long way in ensuring that the ADIs adopt consistent policies and procedures to hedge risks relating to issuance of covered bonds and apply an appropriate capital treatment exposure associated with covered bond issuance. This might spurge some issuances in the recent future and the Australian market is all set for revival with covered bond issuance as the most sought after funding tool.

[Reported by Abhijit Nagee]

News on Covered Bonds: New Zealand and South Korea puts up Covered Bond legislation

/in /by

New Zealand and South Korea puts up Covered Bond legislation

 

27th July, 2012: More and more countries outside Europe are vying to have a dedicated legal framework for covered bond issuances. It seems the world is all game for covered bonds legislation and intermittently we hear non-European nations putting up covered bond laws in place specifically post the sub-prime crisis. The recent proposal of Singapore – Consultation Paper on Covered Bond Issuance by Banks in Singapore for issue of covered bond is an example.

This time it is New Zealand and South Korea. New Zealand had regulatory guidelines on covered bonds already. The Reserve Bank of New Zealand ("RBNZ") took a step ahead and released a draft of the new legislative framework to govern covered bonds with the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill ("the Bill"). Whereas for South Korea, the draft legislation is all set to release by the end of July, 2012.

Covered Bonds Legislation In New Zealand – Currently covered bond issuances in New Zealand are solely governed by contract and banks in New Zealand have been issuing Covered Bonds under contractual agreement for the past 2 years. A designated legislative framework would improve the nation's access to the Covered Bonds market and would also help bag positive credit rating which in turn would lower the cost of issuance for the banks. Legislation would also facilitate investor confidence in these instruments through greater certainty and would contribute to financial system stability.

The Bill amends the Reserve Bank of New Zealand Act, 1989 with a view to provide legal framework to the covered bonds issuances by banks in New Zealand; it also makes provisions for the framework to be extended to other entities, such as non-bank deposit takers in future.

The Bill aims at providing legal certainty as to the treatment of cover pool assets and specifically requires that the cover pool assets are beneficially owned by an Special Purpose Vehicle ("SPV"), which is a separate legal entity so that the assets of the cover pool be segregated from the assets of the issuer by way of true sale of those assets to the SPV. This would mean that the SPVs cannot be included in the statutory management of the bank as an associated person and hence ensure that cover pool assets will not be available to meet the claims of creditors other than covered bond-holders, should the issuing bank become insolvent.

Key aspects and requirements placed in the Bill:

  • Mandatory registration of the covered bond programme prior to issuance after ensuring that the covered bonds issues comply with the registration requirements on a continuous basis to ensure  transparency and offer greater clarity for investors and depositors;

  • To ensure that the covered bond programme specifies a test(s) to determine whether the value of the cover pool assets is at least equal to the principal amount outstanding on the covered bonds

  • Appoint an asset pool monitor who is independent of the issuer to verify the accuracy of the test as stated above and also to verify the register of assets.

  • covered bond programmes are to be registered subject to class designation based on the assets in the relevant cover pool.  

The Bill has been referred to the Finance and Expenditure Committee for consideration and is expected to come into effect sometime in November 2012.  Once enacted, the legislation will facilitate New Zealand registered banks to have access to the covered bond market as a source of long-term relatively stable finance and would also probe investor confidence and greater transparency.

The Reserve Bank of New Zealand has produced a regulatory impact statement in relation to this Bill. A copy of that regulatory impact statement, dated 28 March 2012, can be found at –

Following the league, the South Korean Financial Services Commission ("FSC") also has plans to release the draft covered bond legislation by July end pending final submission to the Parliament in November 2012. Thus the local Korean covered bonds issuance under the designated legislative framework is likely before the end of this year. This signifies that the covered bond market is all set for a boom with a number of countries making simultaneous issuances under the legislative framework. The discussion revolving covered bonds legislation in Korea has much deeper roots than Singapore and there have also been previous covered bond issuances in the Korean market. The FSC and Financial Supervisory Service ("FSS") published guidelines governing covered bond issuance in June 2011 as part of comprehensive measures to address the level of household debt. Korean Banks will be keen to issue covered bonds once the legislation is passed.

For more news on Covered Bonds see our Covered Bonds News page here.

[Reported by Abhijit Nagee]