News on Covered Bonds: Covered Bonds Bill considered again to promote covered bonds in US

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Covered Bonds Bill considered again to promote covered bonds in US

 

5 May, 2011: Covered Bond Bill introduced by Rep. Scott Garrett and Rep. Carolyn Maloney in March, 2011 for the development of covered bond market in the US and was considered and approved by a sub-committee of House of Representatives recently. The Bill will be put up for consideration before the House Financial Services Committee. The Bill has been several times before put up for consideration (see our news here). Some of the salient features of the bill are:

  • The Bill provides requirement of eligible issuer, single cover pool for issuance, eligible assets etc.
  • Covered bond regulatory oversight program to regulate the covered bonds issued and the covered bond regulator shall apply the standards established by the Secretary to evaluate the covered bonds to be issued by an eligible issuer for approval. The Secretary is to maintain a registry that would have a record of all the approved covered bonds.
  • The regulators may establish minimum over-collateralization requirements for covered bonds backed by eligible asset classes.
  • The Bill places requirement for monthly reporting to the Secretary, covered bonds regulator, indenture trustees, the bondholders and independent asset monitor.
  • Covered bondholders to retain claim against the issuer for any deficiency with respect to the covered bonds or related obligation and the obligation of the issuer shall remain absolute.
  • In case an uncured default occurs, before the issuer enters conservatorship, receivership, liquidation or bankruptcy, an estate shall be created separate from the other assets of the issuer for the affected covered bonds.

The Bill intends to create a new market for financing mortgages and help revive the housing markets in US. The text of the Bill is available here.

[Reported by: Nidhi Bothra]

News on Covered Bonds: Turkey’s first covered bond issuance

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Turkey’s first covered bond issuance

SME loan based pool indicates a new opportunity for emerging  market issuances

 

28 July, 2011: Turkey’s Sekerbank has come up with Turkey’s first covered bond issuance. The transaction should receive immense attention being one of the first transaction from an emerging market country, and that too, from the traditional domain of residential mortgage loans with which covered bonds have usually been associated.

Turkey has a law dealing with covered bonds  but this law is limited only to mortgage loans.  It appears that there is another law on asset-backed covered bonds which deals with non-mortgage-backed assets. The law provides for ring-fencing of the assets in the cover pool in the event of bankruptcy of the issuer.

The present transaction has an over-collateralisation of 25%. There is a liquidity facility covering 9 months’ interest, and there is also a provision for appointment of a replacement servicer.

Despite Turkey’s sovereign rating of Ba2, the transaction attained a rating of A3, one notch below the bank’s domestic rating.

Since the assets in cover pool can only be used to repay the covered bonds, the transaction is almost like a revolving pass-through transaction.

[Reported by: Vinod Kothari]

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

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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

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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

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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

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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

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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

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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]

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[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