Covered Bond Watch 28.09.2009

Heiko [email protected]+44 20 7595 8569

www.GlobalMarkets.bnpparibas.com

EUROPEAN CREDIT RESEARCH I SEPTEMBER 2009

The Covered Bond Guide 2009

EUROPEAmsterdamHerengracht 477Amsterdam 1017 BS NetherlandsTelephone: +31 20 550 1212

Athens94 Vassilissis Sofias Avenue& Kerasountos 1Athens 11528, GreeceTelephone: +30 210 74 68 000

BrusselsAvenue Louise 489Brussels 1050, BelgiumTelephone: +32 2 518 08 11

BudapestHonvéd utca 20Budapest 1055, HungaryTelephone: +36 1 374 63 00

Dublin5 George’s Dock IFSCDublin 1, IrelandTelephone: +353 1 612 5000

FrankfurtGrüneburgweg 14Frankfurt 60322 GermanyTelephone: +49 69 71930

Geneva2 Place de Hollande1211 Geneva 11SwitzerlandTelephone: +41 22 787 7111

London10 Harewood AvenueLondon NW1 6AAUnited KingdomTelephone: +44 20 7595 2000

LuganoRiva A, Caccia 1ALugano 6907SwitzerlandTelephone: +41 91 985 5111

Luxembourg10A Boulevard RoyalLuxembourg L-2093Telephone: +352 46 47 1

New YorkThe Equitable Building787 Seventh AvenueNew York, NY 10019, USATelephone: +1 212 841 2000

San FranciscoOne Front Street, 23rd Floor, San Francisco, CA 94111, USATelephone: +1 415 772 1300

São PauloAv. Pres. Juscelino Kubitschek510, 12 andar, São Paulo 04543-906,BrazilTelephone: +55 11 3841 3100

ASIA-PACIFICBangkok29th Floor, Abdulrahim Place990 Rama IV RoadBangrak, Bangkok 10500ThailandTelephone: +66 2 636 1900

Beijing19/F China World Tower 1C.W.T.C.1 Jianguomenwai AvenueBeijing 100004People’s Republic of ChinaTelephone: +8610 6535 0888

Ho Chi Minh CitySaigon Tower, 29 Le Duan, Suite 504, Dist. 1, Ho Chi Minh City, VietnamTelephone: +848 823 1265

Hong Kong63/F Two International Finance Centre,8 Finance Street, Hong KongTelephone: +852 2909 8888

JakartaMenara Batavia, 20th Floor, Jl. K.H. Mas Mansyur, Kav 126, Jakarta 10220, IndonesiaTelephone: +62 21 572 2288

Manila30th Floor Philamlife Tower8767 Paseo de Roxas AveMakati City, Metro ManilaPhilippines 1226Telephone: +632 814 8700

MadridCalle Ribera del Loira 28Apartado de Correos 28046Madrid 28042, SpainTelephone: +34 91 388 8300

MilanPiazza San Fedele 2Milan 20121, ItalyTelephone: +39 02 72471

Moscow1-2 BolshoyGnezdnikovsky, Pereoulok125009 Moscow, RussiaTelephone: +7 095 785 6000

Paris3 rue d’AntinParis 75002, FranceTelephone: +33 1 42 98 12 34

Sofia2 Tzar Osvoboditel BlvdSofia 1000, BulgariaTelephone: +359 2 9218 640

WarsawPl. Pilsudskiego 1Warsaw 00-078, PolandTelephone: +48 22 697 2300

ZurichSelnaustrasse 16Zurich 8022, SwitzerlandTelephone: +41 58 212 6868

AMERICAS

Buenos Aires25 de Mayo 471Buenos Aires 1002ArgentinaTelephone: +54 11 4318 0318

Chicago209 South La Salle StreetSuite 500Chicago IL 60604, USATelephone: +1 312 977 2200

Montreal1981 McGill College AvenueMontreal, Quebec H3A 2W8CanadaTelephone: +1 514 285 6100

Mumbai1 Forbes, 6th floor1 Dr.V.B.Gandhi Marg,Mumbai 400 023, IndiaTelephone: +91 22 6618 2500

OsakaUmeda Square Building1-12-17 Umeda Kita-kuOsaka 530-0001, JapanTelephone: +81 6 6457 1390

Seoul23rd & 24th Floor, Taepyeongno Building310 Taepyeongno 2-ga, Jung-gu, Seoul 100-767KoreaTelephone: +82 2 317 1700

Shanghai25F Shanghai World Finance Centre,100 Century AvenueShanghai 200120People’s Republic of ChinaTelephone: +86 21 2896 2888

Singapore20 Collyer Quay#05-01 Tung CentreSingapore 049319Telephone: +65 6210 1288

Sydney60 Castlereagh StreetSydney, NSW 2000, AustraliaTelephone: +61 2 9216 8633

Taipei6th Floor, No 52 Sec.4Min Sheng East RoadTaipei 105, TaiwanTelephone: +886 2 2716 11 67

TokyoGranTokyo North Tower1-9-1 Marunouchi, Chiyoda-kuTokyo 100-6740, JapanTelephone: +81 3 6377 2000

MIDDLE EAST & ASIAManamaUGB Tower, Diplomatic Area RoadManama 317, Bahrain Telephone: +973 17 53 1152 Please refer to important information found at the end of the report

After the longest market freeze in the history of Jumbo Covered Bonds, the ice was finally broken with the ECB’spurchase programme for Covered Bonds.

The number of new Covered Bond issuers is stillgrowing, while the overall market size continues toconsolidate. Future growth potential will also dependon the pace of recovery of the MBS market.

Tougher rating requirements and falling bank ratingshave increased the rating pressure on Covered Bonds.Rising rating pressure should act as a catalyst forfurther improvements of Covered Bond frameworksand structures.

2 European Covered Bond Research

Contents Breaking the ice 3

Austrian Fundierte Anleihen 16

Austrian Pfandbriefe 19

Canadian Covered Bonds 21

Danish Covered Bonds 24

Dutch Covered Bonds 26

Finnish Covered Bonds 29

French Obligations Foncières 31

French Covered Bonds 34

Caisse de Refinancement de l’Habitat 37

German Pfandbriefe 39

Hungarian Covered Bonds 44

Irish Asset Covered Securities 46

Italian Covered Bonds 49

Luxembourgian Lettres de Gage 51

Norwegian Covered Bonds 53

Portuguese Covered Bonds 55

Spanish Cédulas 57

Swedish Säkerställda Obligationer 60

UK Covered Bonds 63

US Covered Bonds 67

Appendix - Glossary 71


Breaking the ice Covered Bonds have survived the perfect storm. The collapse of Lehman, which can be seen as one of the peaks of the financial crisis, triggered the longest market freeze covered bonds have seen since the creation of the Jumbo market. Between mid September 2008 and the beginning of 2009 no Jumbo Covered Bond was launched. Instead, the market saw a rapid increase in government guaranteed bond issuance, which peaked in January 2009. Even when the covered bond market started to thaw at the beginning of 2009, the vast supply of government guaranteed debt was crowding out covered bond issuance, especially at the shorter end of the curve.

The ice was finally broken with the announcement by the ECB to launch a €60bn covered bond purchase programme in May 2009. In anticipation of the programme, which started on 6 July 2009, secondary Jumbo swap spreads started to tighten in most market segments across the curve. At the same time primary market activity picked up significantly, with issuance volumes exceeding those of government guaranteed bonds. Tightening of secondary spreads and re-opening of the primary market even accelerated with the actual start of the purchase programme at the beginning of July.

Clearly, a three month market freeze was not the only effect the crisis had on covered bonds. A contracted investor base, dropping market liquidity and increased rating pressure are amongst the most significant effects the crisis had on covered bonds. However, all these aspects are outweighed by the fact that covered bonds were one of the first non-guaranteed funding products to break the ice. The significant support that covered bonds have seen through the ECB purchase programme can seen as an acknowledgement of the importance that covered bonds play within the funding of banks.

Monthly Euro Benchmark Issuance

05

1015202530354045

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Covered BondsGovernment Guraranteed

€bn

Source – BNP Paribas Market consolidation continues Despite the continuing market recovery, we expect the market consolidation to continue in the coming 12 to 18 months, while mortgage covered bonds will gain even more relative market share. The main reason lies in the reduced issuing activity in the public sector covered bond segment. Since the beginning of the crisis, we saw several large issuers of public sector


covered bonds either announcing significant reductions of their lending portfolios or disappearing from the market. At the same time, volumes of maturing covered bonds are reaching new highs. While the trend of shrinking market share of public sector covered bonds is likely to continue over the next few years, they will remain a core part of the covered bond market. In the medium future, their importance could even grow again as a potential tool to re-finance the increased public sector deficits. Such a revival of public sector covered bonds would however depend on a significant tightening of Jumbo swap spreads in order to provide competitive funding for the public sector lenders.

Outstanding Jumbo Covered Bonds By Collateral

0

100

200

300

400

500

600

1996 1998 2000 2002 2004 2006 2008

Mortgage Covered Bonds

Public Covered Bonds

€bn

Source – BNP Paribas On the mortgage side, we still see the number of issuers growing, however this may continue at a lower pace than in previous years unless this growth comes from outside of Europe. Funding of existing mortgage portfolios will remain one of the main drivers for supply as new mortgage lending volumes will probably not pick up significantly in the near future. Another important parameter is the future development of the MBS market. A protracted recovery of this sector could indeed cause issuers to favour covered bonds as an alternative funding tool. We see the biggest impact of this factor on covered bond supply from outside Europe, i.e. USA and Asia. A kick start of such markets could result in the significant growth of the mortgage covered bond market, which we otherwise expect to remain at its current volume.

The ECB Purchase Programme On 7 May 2009, the ECB announced its plan to purchase covered bonds with a volume of up to €60bn. Further details on the programme were announced on 4 June 2009 and actual purchase activities started on 6 July. The programme covers direct purchases in the primary and secondary market. The purchases are carried out through the ECB itself as well as the Eurosystem central banks. The programme is scheduled to run until the end of June 2010. Covered bonds that are purchased under the programme must meet the following eligibility criteria:

Eligible for monetary policy operations with the ECB. Denominated in Euro and issued by credit institutions incorporated in the

Euro area. Covered bond structures, where the issuer is not a credit institution but a specialised issuing vehicle can also qualify under certain circumstances.


Held and settled in the Euro area. Compliant with Article 22(4) UCITS or offering similar safeguards (i.e.

structured covered bonds are eligible at the discretion of a Eurosystem central bank).

Minimum size of €500mn. In special cases, covered bonds with a lower outstanding volume can be bought as well, provided that the issue size is not below €100mn.

Minimum rating of AA from at least one of the major rating agencies. Covered bonds shall be issued pursuant to legislation, which is in force

in a member state of the Euro area or (in case of structured covered bonds) the law governing their documentation shall be the law of a member state of the Euro area.

Since the purchase programme started, the ECB has published the total volume of purchased covered bonds on a daily basis. Breakdowns by country, market segment or maturity have not been published. Every month the ECB publishes a special report on the progress of the purchase programme. So far, these reports have provided a breakdown of monthly purchases conducted in the primary and secondary market. Within the first two months of the purchase programme, 78% of the purchases had been conducted in the secondary market.

Monthly purchase activity by market segment

0

1

2

3

4

5

Jul-09 Aug-09

PrimarySecondary

€bn

Source – ECB As a result of the purchase programme, secondary Jumbo swap spreads tightened significantly. While the tightening trend started already with the announcement of the programme, the actual start in July 2009 even accelerated the movement. In the primary market, the programme led to a noticeable market re-opening. Issuing activity first increased for covered bonds issued by well rated issuers and/or in well established markets (e.g. Germany and France). However, the scope broadened over time and allowed issuers, who had not been tapping the market since the start of the crisis, to successfully issue covered bonds.


Progress of the ECB’s purchase programme

0

10

20

30

40

50

60

Jul 09

Aug 09Sep 09

Oct 09

Nov 09

Dec 09

Jan 10

Feb 10

Mar 10Apr 1

0May 1

0Jun

10

EUR bn

Source – ECB It remains to be seen if the ECB will continue with its programme until the end of June 2010 or reach the €60bn limit. A stronger and especially broader recovery of the covered bond market could lead to an earlier end or at least a significant modification of the purchase programme. Even after the programme has ended, the covered bond market still can take comfort from the fact it is viewed as a vital part of the financial system and thus be likely to receive support in a potential future crisis.

The covered bond concept Despite the significant impact the financial crisis had on issuance volumes in the covered bond market, the pace at which the number of covered bond issuers grew never slowed down. The growing number of programmes further increased the diversity in the covered bond market, however the rate of covered bond innovation slowed down significantly. Despite the broadened market, the defining core features of covered bonds have not changed:

Preferential claim of the covered bondholder on a segregated pool of assets. In the event of the issuer’s bankruptcy, the assets in the cover pool are used exclusively to satisfy the claims of covered bondholders. Other creditors typically have no access to these assets until all covered bonds have been fully repaid.

Full recourse against a bank, acting as issuer or asset originator. Covered bonds are senior obligations of the issuer/originator. In a pre-bankruptcy scenario, interest and capital on the outstanding covered bonds are paid through the overall cash flow of the issuer, and are not limited to the cash flows arising from the cover pool. In the event of issuer bankruptcy, claims from covered bondholders which cannot be satisfied from the cover pool rank pari passu with unsecured creditors of the issuer.

Dynamic nature of the cover pool. Maturing or defaulting assets within the cover pool are replaced by the issuer to ensure that there is always sufficient cover for the outstanding covered bonds. In many frameworks, the composition and value of the cover pool is observed by an independent cover pool monitor which usually reports to the banking supervisory authority. In the case of structured covered bonds, the monitoring of the cover pool is mainly conducted by the rating agencies.


Auditing firms usually run annual checks on the validity of the asset cover test calculations.

Non-acceleration in the event of the issuer’s/originator’s bankruptcy. In the event of the issuer’s bankruptcy, cash flows arising from the segregated pool of assets will be used to make interest and capital payments on the outstanding covered bonds as originally scheduled. What sounds relatively straightforward also leads to a number of questions about management of the segregated pool as well as mismatches between cover assets and covered bonds in terms of interest rates, currencies and maturities. These problems are addressed mainly in the post-bankruptcy procedures and the asset/liability matching requirements contained in the covered bond framework.

The way in which these core features are implemented differs significantly between frameworks, with the segregation of cover assets being the main point of differentiation. So far, one can identify four main systems of asset segregation in the covered bond world.

On-balance sheet register The classic form of asset segregation relies on the earmarking of cover assets through a special cover register. Respective bankruptcy or covered bond legislation provides a preferential claim of the covered bondholders on the registered cover assets in the event of the issuer’s bankruptcy. The register is usually kept by an independent monitor which ensures that only eligible assets are entered and that there is always enough collateral to secure the outstanding covered bonds. The cover assets remain on the balance sheet of the issuer/originator and are only segregated in the event of the issuer’s bankruptcy. Covered bondholders have full recourse against the issuer/originator. A typical example for this type of asset segregation would be the German Pfandbrief.

Bankruptcy remote subsidiary This method is based on the segregation of assets outside the originator’s balance sheet. In this case the cover assets are transferred to a bankruptcy remote subsidiary which uses these assets as collateral for the covered bonds. It is important to note that the subsidiary cannot be infected by the bankruptcy of the parent company. On the other hand, covered bondholders only have access to the assets held by the subsidiary and no further recourse against the parent company. Typically, all of the assets held by the subsidiary are collateral assets. A typical example for this type of asset segregation would be French Obligations Foncières.

Assignment to a guaranteeing vehicle This segregation method uses a transfer of cover assets to an SPV or trust based on an equitable or silent assignment. Instead of issuing a covered bond itself, the SPV or trust will issue a guarantee for a senior unsecured bond from the originating bank. The equitable or silent assignment means that the transfer of assets to the SPV or trust is only completed upon certain trigger events such as the issuer’s default. From that moment on, the SPV or trust will take over payment of interest and capital to the covered bondholders. The bondholders have full recourse against the issuer/originator based on the senior bond, and additional recourse against the SPV or trust based on the guarantee. A typical example for this type of asset segregation would be UK Covered Bonds or Canadian Covered Bonds.


Re-packaging of secured bonds This method is based on a two-step securitisation. The cover assets are used to secure a certain type of bond or loan which is then transferred or sold to an SPV or subsidiary. The SPV or subsidiary then issues a covered bond with the same amount, coupon and payment dates. Each covered bond is thus secured by one or several secured bonds or loans with identical terms. While the covered bond issuer is merely passing on cash flows to the covered bondholders, asset substitution is conducted at the level of the originator, which has to ensure that the secured bonds/loans are sufficiently collateralised. As the secured bonds/loans are full recourse obligations of the originator, this recourse is passed on to the covered bondholders through the covered bond issuer. A typical example for this type of asset segregation would be US Covered Bonds.

In some cases, the above-mentioned segregation methods can be combined. This is usually the case where a special bank principle requires the establishment of an issuing subsidiary, which in turn needs to segregate assets within its balance sheet via a cover register. The segregation within the issuing subsidiary becomes necessary if the subsidiary also holds other types of assets which are funded via senior unsecured debt. A typical example for this type of asset segregation would be Irish Asset Covered Securities.

Although the asset segregation is such a vital part of the covered bond concept, it tells little about the quality of the covered bond. Composition of the cover pool, matching requirements, supervision, post-bankruptcy procedures and, to a varying extent, the creditworthiness of the issuer are important factors for the quality of a covered bond. However, the asset segregation largely impacts the dynamics of a covered bond, and thus influences the effectiveness of the other security features.

Rating While covered bond ratings have shown a relatively high level of stability during the first 12 months of the crisis, changing rating requirements and decreasing issuer ratings have started to increase the pressure on covered bond ratings. As a result, the number of rating downgrades of covered bonds increased in 2009 and is likely to increase further in the coming months. However, in the longer run, we expect covered bond ratings to stabilise or even increase again. This stabilisation will not purely come from a turn of the rating cycle for banks but also from expected modifications to covered bond frameworks and structures. The increased focus of rating agencies on cover pool liquidity is the main driver behind this development. Already we have seen the introduction of mandatory liquidity buffers in Germany. Further frameworks or issuers are likely to follow in order to accommodate the increased liquidity requirements of rating agencies.

All eyes on liquidity As usual, individual solutions or enhancements are easier and faster to implement than a change of regulatory frameworks. In addition, they can be more cost efficient, especially for better rated issuers which could stabilise their covered bond ratings with less extensive and thus cheaper measures (e.g. smaller liquidity buffer). At the same time, individual enhancements can be less transparent and increase the research effort of investors as market heterogeneity increases. Investors might therefore prefer standardised solutions that do not follow issuer-specific rating requirements.


Instead of finding new ways to compensate liquidity risk, issuers can also choose to reduce asset liability mismatches and thus lower liquidity risk. While there may be a general trend towards less asset-liability mismatches within banks’ balance sheet, which would also be reflected in covered bonds, this would only lead to a gradual reduction of liquidity risk over time. By their nature, covered bonds always have an element of liquidity risk, stemming from the mismatch of cash flows between cover pool and covered bonds. The fact that covered bonds are not pass through structures but fixed rate bonds with a bullet repayment is an important feature for most “rates” investors. Covered bonds that turn into pass though structures after the issuer’s insolvency can be an effective way to address liquidity concerns of rating agencies, but might not always find investors’ approval, especially where the issuer has a relatively low unsecured rating. In addition, implementation of different repayment structures can be problematic, when a bank has already covered bonds outstanding with hard bullet maturities. We thus expect the majority of issuers to favour internal or external liquidity support mechanisms for the cover pool over a general reduction of mismatches.

Still a AAA market Despite rising rating pressure the covered bond sector is still widely seen as a AAA market. This has also been shown in the willingness of most issuers to preserve the current rating level of their covered bonds. However, changing rating requirements generally lead to a greater linkage between issuer rating and covered bond rating. This means that even if covered bonds have kept or will keep their AAA rating, potential future downgrades of the issuer are likely to have a bigger impact on the covered bond rating. Potential rating volatility is thus higher than before the crisis. As long as issuers are committed to achieve or keep the highest possible rating, the greater linkage can also have a positive effect as it gives an incentive to issuers and regulators to further improve covered bond frameworks and structures. At the same time, rating agencies have to make sure that their methodologies adequately reflect the specific nature of covered bonds (first and foremost the dual claim system). Especially, an overly strong focus on cover pool performance and disregard of the issuer’s role could make covered bond issuance, at least in the AAA sector, increasingly uneconomical for banks.


Rating share of outstanding Jumbo Covered Bonds (Sep 2009)

0%

20%

40%

60%

80%

100%

S&P Moody's Fitch

nrAA-AAAA+AAA

Source – BNP Paribas, S&P, Moody’s, Fitch S&P In February 2009 S&P announced a change of its rating methodology for covered bonds. The proposed methodology aimed at dropping the de-linked rating approach that S&P employs in most covered bond sectors. Under the current de-linked approach, the rating of the covered bonds is not linked to the unsecured rating of the issuer. As long as deficiencies within the credit quality of the pool or its cash flow matching are compensated by over-collateral, a “AAA” rating is achievable. As a result, a downgrade of the issuer rating usually has no negative impact on the covered bond rating.

Under the proposed new methodology the covered bond rating is generally linked to the issuer rating. S&P will categorise individual covered bond programmes into three distinct risk categories. A programme’s risk category will determine how many notches the covered bond rating can be above the issuer rating. S&P has identified three key risk factors that determine which programme will fall into which of the three categories. These risk factors are:

Asset-liability mismatch: By comparing the weighted-average maturity of the assets with the weighted-average maturity of the liabilities, S&P determines the maturity gap. The maximum net liquidity need on a rolling quarterly basis is also taken into consideration.

Jurisdictions: S&P will segment the covered bond jurisdictions, considering the strength of the legislation, the importance of the covered bond product to that market and the historical track record of that market.

Refinancing costs: S&P will assess the refinancing costs of the segregated pool depending on the access to liquidity. For programmes that have access to third party liquidity (e.g. ECB repo) the assumed costs will be based on these specific refinancing rates (e.g. ECB repo rates or other agreed rates for liquidity lines). Programmes that rely on asset sales to raise liquidity will face significant increases in over-collateral requirements, as the assumptions for achievable prices in such an asset sale have changed.

Based on the above risk factors, S&P assigns the programme to one of the following three categories:


Category 1: This category basically still allows a full de-linkage of the covered bond rating from the issuer rating. Covered bonds in this category need to have a full match between assets and liabilities or access to a committed liquidity line.

Category 2: Covered bonds can only be rated AAA if the issuer is at least rated A or A-1 if it has no long-term rating. Below the AAA level, a maximum of six notches is possible, i.e. issuers rated BBB+ can get to a maximum covered bond rating of AA+.

Category 3: Covered bonds can only be rated AAA if the issuer is at least rated AA- or A-1+ if it has no long-term rating. Below the AAA level, a maximum of four notches is possible. S&P states that programes from countries classified in Category 2 could be placed in Category 3 if the asset-liability mismatch exceeds a certain level.

Since the proposal of and request for comments on the changed methodology in February 2009, the final methodology has not been published as of the day of this publication. The agency stated in July 2009, that due to the large amount of comments it had received the final methodology would not be published before September 2009. The proposed methodology is likely to lead to several rating downgrades. However the actual rating impact will depend on the changes made to the proposed methodology and the issuers’ ability and willingness to preserve the AAA rating of their covered bonds.

Moody’s According to Moody’s rating methodology, the primary rating target is the expected loss, while the quality of the issuer generally has a rating impact on the covered bonds. The quality of the cover pool mainly determines the expected loss in a stressed scenario. Cash flow mismatches are considered by Moody’s via the application of haircuts to the collateral value. In April 2009, Moody’s announced an increase in these haircuts based on the increase re-pricing risk during the financial crisis. As a result of the increased haircuts, Moody’s raised the over-collateralisation requirements for covered bonds. The vast majority of issuers complied with the higher requirements for over-collateralisation and thus avoided a downgrade of their covered bonds. The quality of the issuer determines the probability with which the stressed scenario can occur. Moody’s also considers the issuer’s ability to replace maturing and defaulting cover assets in a pre-insolvency scenario. Deficiencies in asset quality and cash flow matching can be compensated for with over-collateral. As the quality of the issuer deteriorates, the rating stress on the covered bonds increases. As a result, timeliness of payment could gain in weight, and the impact of the issuer quality on the covered bond rating would increase. If the issuer rating falls below a certain level, increases in the level of over-collateralisation might no longer prevent a downgrade of the covered bond rating. In order to further explain the link between issuer rating and covered bond rating, Moody’s introduced a Timely Payment Indicator (TPI). The TPI determines the maximum rating that a covered bond programme can achieve with its current structure, while allowing for the addition of a reasonable amount of over-collateralisation. The higher the TPI, the lower the linkage between the sponsor bank and the covered bond ratings. The main drivers of the TPI are strength of legislation/structure, hedging, type of assets and type of liabilities. For each


covered bond programme, an individual TPI is published. Public sector covered bonds usually receive higher TPI than mortgage covered bonds.

Fitch Since 2007, Fitch employs a rating methodology, which is built around the “discontinuity factor”. This factor measures the risk of an interruption of payments under the covered bonds in the event of the issuer’s insolvency. The higher the discontinuity factor (on a scale of 0% to 100%), the stronger the linkage between the probability of default of the issuer and the probability of default of the covered bond. The discontinuity factor is determined by the level of asset segregation, provisions for alternative management of the cover pool, potential liquidity gaps and covered bond oversight. Each driver has a different weighting, with asset segregation being the most important.

Based on the discontinuity factor and the probability of default of the issuer, the lowest achievable probability of default of the covered bonds is calculated and assigned with a rating. A stressed cash flow analysis of the pool will test and, if necessary, adjust these ratings. In a final step, Fitch determines the level of expected recovery from the cover pool and applies a notching (up or down) to the rating level, which has been determined by the covered bond probability of default.

In March 2009, Fitch announced a change in its assessment of liquidity risk as a result of the financial crisis. The main change to the methodology, which was implemented in July 2009, was an increase of the weighting of the liquidity gap within the discontinuity factor. In addition, the agency increased the haircuts on collateral assets, leading to higher over-collateral requirements. The vast majority of issuers managed to preserve the current rating level of their covered bonds by increasing the level of over-collateralisation. However, increased discontinuity factors could lead to higher rating volatility in the future, in the case of falling issuer ratings.

Risk weighting In general, covered bonds have the same risk weighting as unsecured debt issued by the same bank. However, within the EU, covered bonds can qualify for a reduced risk weighting if they meet certain criteria. These criteria are set out in the European Capital Requirements Directive (CRD) of June 2006.

The first requirement that CRD sets out is that covered bonds comply with Article 22(4) of the UCITS directive. The requirements of Article 22(4) are:

Issuer is an EU credit institution; Bonds issued on the basis of a legal provision to protect bondholders; Special supervision by public authorities; Sums deriving from the issuance must be invested according to the law

in assets which cover the claims of the bondholders; Bondholders have a preferential claim on assets if issuer fails; The member states must notify the EU Commission.

In addition to the referral to Article 22(4) of the UCITS directive, CRD holds another set of requirements which focus on the quality of the cover assets. Annex 6 of the CRD contains the following collateral criteria:


Exposures to or guaranteed by public sector entities (i.e., central governments, central banks, public sector entities, regional governments and local authorities) in the EU;

Exposures to or guaranteed by Non-EU public sector entities if they qualify for the credit quality assessment step 1 (minimum rating of AA-). Non-EU public sector entities that qualify for the credit quality assessment step 2 (rated between A+ and A-) are limited to 20% of the nominal amount of outstanding covered bonds;

Exposures to institutions that qualify for the credit quality assessment step 1 (minimum rating of AA-) if the total exposure to these kind of institutions does not exceed 15% of the nominal amount of outstanding covered bonds;

Residential mortgage loans with a maximum LTV of 80%; Commercial mortgage loans with a maximum LTV of 60%. Commercial

mortgage loans with a maximum LTV of 70% are permitted if the covered bonds provide for a minimum over-collateralisation of 10%;

RMBS which are secured by at least 90% with mortgages with a maximum LTV of 80% as long as the share of these RMBS does not exceed 20% of the outstanding covered bonds;

CMBS which are secured by at least 90% with mortgages with a maximum LTV of 60% as long as the share of these RMBS does not exceed 20% of the outstanding covered bonds.

Until the end of 2010, the share of RMBS and CMBS is not limited if the tranches are AAA-rated. Covered bonds meeting the above listed requirements qualify for a preferential treatment when determining the risk weighting under the Standardised Approach as well as the Internal Ratings Based Approach.

Standardised Approach The standardised approach links the risk weighting of the covered bonds to the risk weighting of the issuer. The risk weighting of the issuer itself can either be linked to the risk weighting of the country it is located in (Option 1: country’s risk weighting minus one notch) or to the credit rating of the financial institution itself (Option 2).

Risk weighting of covered bond under the Standardised Approach Option 1 Option 2

Sovereign Rating

Issuer Risk Weighting

Covered Bond Risk Weighting

Issuer Rating Issuer Risk Weighting

Covered Bond Risk Weighting

Aaa - Aa3 AAA - AA-

20% 10% Aaa - Aa3 AAA - AA-

20% 10%

A1 - A3 A+ - A-

50% 20% A1 - A3 A+ - A-

50% 20%

Baa1 - Baa2 BBB+ - BBB-

100% 50% Baa1 - Baa2 BBB+ - BBB-

50% 20%

Source - European Commission, BNP Paribas Internal Ratings Based Approach (IRB) Within the IRB, the risk weighting is based on the following parameters: Probability of Default (PD), Loss Given Default (LGD), Maturity of the bond and Exposure at default. The Foundation IRB allows the bank that holds the covered bond to assess PD itself, provided that it will not reach a value of


less than 0.03%. LGD and maturity are set by the regulator. For covered bonds, the LGD is set at 12.5%. It can be lowered to 11.25% if the covered bond has a AAA rating, or public sector debt and substitution assets used as collateral have a minimum rating of AA-, and securitisation notes do not exceed 10%. The maturity is set at 2.5 years for all bonds. Under the Advanced IRB, both PD and LGD have to be estimated by the credit institution. The maturity can be set within a range of one to five years.

The use of the IRB will, in most cases, result in risk weightings for covered bonds which are below 10%, as long as the issuer is rated single-A or better. For covered bonds of issuers, which are rated in the BBB area, the risk weighting will be higher than 10%, but still below the level, that would be applicable under the Standardised Approach (20% or 50%, depending on the option).

Covered bonds issued before 31 December 2007 which meet the requirements of 22(4) USCITS but not the CRD requirements still benefit from a preferential treatment until their maturity.

Jumbo concept The Jumbo covered bond market represents the benchmark segment within the covered bond market. With a total outstanding volume of roughly €800bn, the Jumbo market represents more than one third of the total market. The segment was created in 1995 in Germany in order to internationalise the investor base for Pfandbriefe which, up to that time, were mainly domestically placed. Jumbo covered bonds have a minimum issuance size of €1bn, a fixed annual coupon and a bullet repayment. Usually there are at least three joint-lead managers and a group of co-lead managers who commit to a market-making agreement within which the underwriters agree to quote two-way prices with a fixed bid-offer spread for a ticket size of up to €15m. The actual bid-offer spread depends on the remaining maturity of the Jumbo covered bond.

Bid-Offer Spreads for Jumbo Covered Bonds Remaining Maturity Bid-Offer Spread

0 - 4 years 5 cents 5 - 6 years 6 cents 7 - 8 years 8 cents 9 - 15 years 10 cents 16 - 20 years 15 cents 21 - 25 years 25 cents

Source - BNP Paribas The market making is carried out as long as there is an adequate free float in the respective bond. Although the commitment to quote prices is directed toward investors, it is also conducted between market makers.

During the financial crisis, low overall market liquidity as well as high volatility caused disruptions also in Jumbo market making. As the crisis intensified during the autumn of 2008, the official two-way market making between banks came to a halt. As of the date of this publication, the inter-bank market making has not been resumed. Overall market liquidity increased to some extent with the market recovery that followed the ECB’s announcement of its purchase programme. However, the market has still not reached the level of liquidity that was prevailing before the crisis.


The agreed minimum size for a Jumbo covered bond is €1bn. Larger issuance sizes are not unusual, but average Jumbo sizes have decreased from their highs over the last three years.

Average issue size of Jumbo covered bonds (excl. taps)

0.0

0.4

0.8

1.2

1.6

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-09

€bn

Source – BNP Paribas Despite the limited secondary market liquidity, the Jumbo sector is still an important and very active market segment. Especially, new issuers use the Jumbo market in order to attract the necessary market attention. The decision of the ECB to buy only covered bonds with a total volume of €500m or more has provided further support to the Jumbo market. Private placements have clearly gained importance during the crisis, especially in markets with a developed domestic investor base. However, not all issuers have access to the private placement sector to the same extent. Overall, issuers will continue to complement private placements with benchmark issuance in order to reach or maintain a diversified investor base.


Austrian Fundierte Anleihen Legal basis The law regarding the issuance of Austrian Fundierte Anleihen (FA) dates back to 1905. It was last amended in June 2005, mainly adding more detailed post-bankruptcy procedures. As a result, payments made under FA no longer accelerate in the event of the issuer’s bankruptcy. However, issuers can specify in their articles of association that the FA will be pre-paid at their NPV upon bankruptcy of the issuer.

The issuers Any Austrian bank which has been granted a special license can issue FA. There is no special bank principle. FA represents full recourse against the issuing bank and a preferential claim on the cover pool in the event of the issuer’s bankruptcy.

Cover assets Austrian FA may be covered by mortgages and public sector debt. In addition, Pfandbriefe and other FA may be used as collateral. So far, only FA secured by public sector collateral have been issued. Loans and bonds which are issued or guaranteed by public sector entities in the EU, the EEA and Switzerland are eligible as collateral. Substitute collateral is limited to a maximum of 15%, and can consist of cash or deposits with central banks and other approved credit institutions. The cover assets have to be entered into a special register. An independent cover monitor has to approve any asset that is entered into or taken out of the cover register. Derivatives used for hedging purposes can also be entered into the cover register. In this case, claims of derivative counterparts rank pari passu with those of covered bondholders.

Matching requirements The cover assets must at all times cover at least the repayments and interest payments of the outstanding FA. In addition, potential administration costs occurring in the event of the issuer’s bankruptcy must be also covered. Issuers may commit themselves to provide cover for the FA on an NPV basis including 2% over-collateralisation. This commitment has to be included in the issuer’s articles of association. BAWAG and KA have both committed themselves to NPV coverage including a 2% over-collateralisation.

Post-bankruptcy procedures In the event of the issuer’s bankruptcy, the cover pools and pertaining covered bonds are split from the issuer’s balance sheet and run on their own. A special administrator will be appointed by the bankruptcy court in order to manage the segregated pools. His task is to satisfy the claims of covered bondholders using payments coming from the cover pool by selling assets or by engaging in bridge financing. If possible, the administrator will transfer the cover pool and the covered bonds to another sound bank. Alternatively, the covered bonds will be pre-paid at their net present value if this has been specified in the articles of association of the issuer. Both issuers of FA have included in their articles of association the possibility of pre-payment at net present value in the event of the issuer’s bankruptcy.


Risk weighting Austrian FA meet the requirements of Article 22(4) of the UCITS directive as well as the CRD requirements, and qualify for a preferential treatment under CRD as long as other covered bonds are not used as collateral.

Market development Both issuers of Fundierte Anleihen only use public sector assets as collateral for their covered bonds. As an additional structural enhancement, KA has established a special system of dynamic over-collateralisation. On a monthly basis the bank calculates interest, currency and market (spread widening) risk of the cover pool. This risk is then offset by additional collateral in the cover pool. BAWAG’s cover pool currently consists exclusively of Austrian public sector debt. In addition to its benchmark FA programme, BAWAG also has a non-benchmark FA programme (with a separate cover pool), for which it provides a minimum over-collateralisation of 7% as long as its unsecured rating is below A3.

Issuance in Austrian FA came to a halt as the financial crisis deepened during 2008. KA, which has been the most active issuer in this market segment, was taken into public ownership in November 2008. Subject to the approval from the EU Commission, KA will be split into a new bank and a legacy entity. The new bank will focus on core activities such as public sector and infrastructure finance in Austria. We expect the new bank to resume issuance of FA in order to fund its lending activities.

Fundierte Anleihen – Rating Overview Issuer Fundierte Anleihen Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch

BAWAG n.a. Aaa (S) n.a. n.a. Baa1 (S) n.a.

KA n.a. Aaa (N) n.a. n.a. Aa3 (N) A+ (S)

Source - S&P, Moody’s, Fitch (S) = stable, (P) = Positive, (N) = Negative, (D) = Developing


Total Outstanding Jumbo FA Outstanding Jumbo FA By Issuer (Sep 09)

0

1

2

3

4

5

6

7

8

9

2003 2004 2005 2006 2007 2008 Sep-09

EUR bn

0

1

2

3

4

5

6

KA

BAW

AG

EUR bn

Source – BNP Paribas

Jumbo FA Gross Issuance Jumbo FA Maturity Profile (Sep 09)

0

1

2

3

2003 2004 2005 2006 2007 2008 Sep-09

€bn

0

1

2

2010 2011 2012 2013 2014 2015

€bn

Source - BNP Paribas


Austrian Pfandbriefe Legal basis Austrian Pfandbriefe are issued in accordance with the Austrian Mortgage Bond Act, which came into effect in December 1927 and was last amended in 2005. In addition, Pfandbriefe can be issued on the basis of the 2005 Austrian Mortgage Bank Act. The original Mortgage Bank Act dates back to 1899.

The issuers Pfandbriefe can either be issued by public sector banks, in accordance with the Mortgage Bond Act, or by specialised mortgage banks in accordance with the Mortgage Bank Act. While the Mortgage Bank Act stipulates a special banking provision, the two existing banks using this framework are exempt from this regulation for historic reasons. Any new issuer that would want to use the Mortgage Bank Act, would have to adhere to the special bank principle.

Cover assets Austrian Pfandbriefe may be covered by mortgages or public sector debt. Both types of collateral have to be kept in separate pools. Commercial and residential mortgage loans only count as collateral up to a LTV level of 60%. Geographically, lending is limited to Austria, other EEA states as well as Switzerland. Mortgage loans to countries where the preferential treatment of claims of Pfandbrief holders is not comparable to that in Austria, must not exceed 10% of the volume of domestic mortgage loans. For public sector collateral the same geographical restrictions apply. In addition, eligible public sector debt must not have a risk weighting of more than 20%. Substitute collateral is limited to a maximum of 15%, and can consist of cash or deposits with central banks and other approved credit institutions. Derivatives used for hedging purposes can also be entered into the cover register. In this case, claims of derivative counterparts rank pari passu with those of covered bondholders. An independent cover pool monitor is appointed by the financial supervisory authority. He has to ensure that the cover required for the Pfandbriefe is available at all times.

Matching requirements The cover assets must at all times cover at least the repayments and interest payments of the outstanding Pfandbriefe. In addition, there is a legal minimum over-collateralisation of 2%. Issuers may commit themselves to provide cover for the Pfandbriefe on an NPV basis. This commitment has to be included in the issuer’s articles of association.

Post-bankruptcy procedures In the event of the issuer’s bankruptcy, the cover pools and pertaining covered bonds are split from the issuer’s balance sheet and run on their own. A special administrator will be appointed by the bankruptcy court in order to manage the segregated pools. His task is to satisfy the claims of covered bondholders using payments coming from the cover pool by selling assets or by engaging in bridge financing. If possible, the administrator will transfer the cover pool and the covered bonds to another sound bank.


Risk weighting Austrian Pfandbriefe meet the requirements of Article 22(4) of the UCITS directive as well as the CRD requirements, and qualify for a preferential treatment under CRD.

Market development In May 2009 the first Austrian Pfandbrief in jumbo format was issued. So far, Erste Bank (ERSTBK) remains the only Jumbo issuer in that market segment with one mortgage Pfandbrief outstanding. We would not exclude the possibility of other Austrian banks joining the Jumbo market with either Public Sector or Mortgage Pfandbrief issues, but the main focus of Austrian banks will likely remain on domestic issuance in smaller sizes.

Austrian Pfandbriefe – Rating Overview Issuer Mortgage Pfandbriefe Unsecured Debt


ERSTBK n.a. Aaa (S) n.a. A (N) Aa3 (N) A (S)



Canadian Covered Bonds Legal basis In the absence of a dedicated covered bond law, Canadian Covered Bonds are based on contractual agreements. Segregation of assets is achieved by transferring them to a special purpose vehicle or a trust, which guarantees a senior unsecured bond issued by the bank.

The issuers In the structures used so far, the covered bonds are issued by the originating bank. The bonds are full recourse obligations of the bank and, in addition, benefit from the covered bond guarantee issued by a vehicle (the “Covered Bond Guarantor”) to which the cover assets have been assigned. Issuers of covered bonds do not require a special license. In June 2007, the Office of the Superintendent of Financial Institutions (OSFI) set a limit to the issuance of Canadian Covered Bonds. The outstanding covered bonds must not exceed 4% of the issuer’s total assets.

Cover assets The cover assets consist of first lien Canadian residential mortgage loans. Depending on the issuer, some cover pools consist partially or completely of mortgage loans that are fully insured by Canada Housing and Mortgage Corporation (CMHC). CMHC is sponsored by the Canadian Government and has full recourse to government funds. It is rated AAA by S&P, Moody’s and Fitch. Covered bonds which are secured exclusively by CMHC insured mortgages, are also referred to as public sector covered bonds by the market.

The cover pool is dynamic and subject to a monthly Asset Coverage Test (ACT). Within the ACT, mortgage loans are only taken into account up to a maximum LTV ratio of 80% in the case of covered bonds issued by Royal Bank of Canada (RY). In the case of covered bonds issued by Bank of Montreal (BMO), the maximum LTV is 80% for uninsured mortgages and 90% for insured mortgages. In case of covered bonds issued by Canadian Imperial Bank of Commerce (CM) the maximum LTV for insured mortgages is 90%. For insured mortgages, there is no index-linked re-valuation of underlying property values in the ACT. All loans are denominated in CAD, and must have an outstanding volume of less than CAD3mn. The ACT provides for dynamic over-collateralisation with a minimum level of 3.1%. For all programmes, the over-collateral resulting from the ACT is capped at 11%.

Cash, 0% risk-weighted public sector debt, bank debt and AAA-rated CAD-denominated RMBS tranches qualify as substitution assets. The share of substitution assets within the pool is limited to a maximum of 10%.

Matching requirements In order to hedge interest and currency risk between the mortgage loans and the outstanding covered bonds, the Covered Bond Guarantor enters into several swap agreements. The swap counterparties are subject to certain minimum ratings. If the rating of the swap counterparty falls below a certain level, payment obligations under the swap need to be collateralised or a new, sufficiently rated swap counterparty needs to be found.


So far, BMO and RY have issued covered bonds with a soft bullet repayment, i.e., the maturity of the covered bonds can be extended by 12 months if the issuer fails to repay the covered bonds at maturity and there is insufficient liquidity within the Covered Bond Guarantor for a timely repayment. The maturity extension allows the Covered Bond Guarantor to generate liquidity, e.g., through liquidating mortgages, without causing a default of the covered bonds. CM has issued covered bonds with a hard bullet maturity, employing a pre-maturity test. However, its programme also allows for the issuance of covered bonds with a soft bullet maturity.

Post-bankruptcy procedures Following an issuer event of default, the assignment of mortgage loans to the Covered Bond Guarantor is completed and the Covered Bond Guarantor will take over payments of capital and interest to the covered bondholders. Substitution of assets would stop and the cover pool would become static. Cash flows arising from the pool would be passed on to the covered bondholders as originally scheduled, as long as the pool is solvent. Solvency of the pool is determined by a monthly Amortisation Test (AT), which replaces the ACT. The principle of the AT is similar to that of the ACT, but with a less strict valuation basis. If the AT is breached, the assets held by the Covered Bond Guarantor will be liquidated and the covered bonds accelerated. The purpose of the AT is to limit subordination of holders of covered bonds maturing at a later date. Covered bondholders continue to have a claim against the issuer, which ranks pari passu with other unsecured creditors.

Risk weighting Canadian Covered Bonds do not meet the requirements of Article 22(4) of the UCITS directive, and therefore do not qualify for preferential treatment under CRD.

Market development With the emergence of CM as the third issuer in Canada, quasi public sector covered bonds were introduced to the Canadian market. As the first issuer, CM used a pool that consisted completely of CMHC insured mortgages. The funding advantage achieved by using insured mortgages as collateral may motivate other issuers to adjust their programmes accordingly. However, issuance activity came to a halt during the autumn of 2008 and we would expect issuers to return to the Jumbo market only if achievable funding levels improve further. CMHC not only provides mortgage lenders with insurance on their loans, but also acts as a buyer of (eligible) secondary mortgages, providing Canadian banks with a very competitive funding alternative to covered bonds.

Canadian Covered Bonds – Rating Overview Issuer Canadian Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch BMO AAA (S) Aaa (S) AAA (S) A+ (S) Aa1 (N) AA- (S)

CM AAA (S) Aaa (S) AAA (S) A+ (S) Aa2 (N) AA- (N)

RY AAA (S) Aaa (S) AAA (S) AA- (S) Aaa (S) AA (S)



Outstanding Canadian CB By Issuer (Sep 09) Jumbo Canadian CB Maturity Profile (Sep 09)

0

1

2

3

4

RY CM BMO

EUR bn

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

€bn



Danish Covered Bonds Legal basis The issuance of covered bonds in Denmark is regulated by the Danish Financial Business Act and Executive Orders. The framework was amended in 2007, mainly in order to achieve compliance with CRD requirements. In addition, the amendment resulted in the abolition of the special banking principle. Before the amendment, only specialised mortgage banks were able to issue covered bonds (Realkredit Obligationer, RO). The amendment of the framework introduced two other types of covered bonds, namely Covered Mortgage Bonds (Særligt Dækkede Realkredit Obligationer, SDRO) and Covered Bonds (Særligt Dækkede Obligationer, SDO). The main difference between the old RO and the new SDRO is compliance with CRD requirements by the latter. In order to achieve this, a requirement to monitor and comply with LTV limits of mortgages in the cover pool was introduced. As a further change, a new type of balance principle was introduced, allowing issuers a greater mismatch between covered bonds and the cover pool.

The issuers Issuers can be either mortgage banks or commercial banks, provided that they have obtained a special license. The issuers are under the special supervision of the Danish Financial Services Authority (DFSA).

Cover assets The collateral for RO and SDRO can consist of commercial, agricultural and residential mortgage loans with a maximum LTV limit of 60%, 70% and 80%, respectively, as well as public sector debt. SDO can be collateralised by mortgage loans with the same LTV limits, as well as ship mortgage loans with an LTV limit of 70%. Ship mortgage loans must be kept in a separate cover pool, and cannot be mixed with other mortgage loans. The geographical range of eligible mortgage loans is generally limited to Denmark, although the DFSA can authorise the issuer to include mortgage loans which have been originated outside of Denmark. In addition, public sector debt as well as bank debt which meet the requirements of CRD can be used as collateral. The volume of bank debt used as collateral must not exceed 15% of the volume of outstanding covered bonds. Derivatives used for hedging purposes can also be included in the cover pool.

Matching requirements Matching requirements for Danish covered bonds (RO, SDRO and SDO) follow the “balance principle”, which limits mismatches between the cover assets and the outstanding covered bonds. Danish issuers have the possibility to choose between a “specific” and a “general” balance principle for their covered bonds. The specific balance principle allows very little mismatch in interest rate, currency, option or liquidity risk, while the general balance principle allows greater mismatches through wider limits in its stress tests. The main difference between the two principles is that the general principle allows maturity mismatches, which enables issuers to issue Jumbo style covered bonds, i.e., non-callable and with a bullet maturity.


Post-bankruptcy procedures In the event of the insolvency of the issuer, substitution of assets would stop and the cover pools would become static. The outstanding covered bonds would not automatically accelerate. An administrator would be appointed with the right to sell assets in the cover pool (to the extent that the contractual provisions of the respective mortgage agreements allow this) in order to bridge liquidity gaps. In addition, the administrator can raise liquidity by taking up a loan. Should the proceeds from the cover assets not be sufficient to fully repay all covered bonds, remaining claims will rank pari passu with the claims of the other unsecured creditors of the issuer if it is a commercial bank. If the issuer is a mortgage bank, remaining claims of covered bondholders rank above claims of other unsecured creditors.

Risk weighting SDRO and SDO meet the requirements of Article 22(4) of the UCITS directive as well as the CRD requirement, and qualify for preferential treatment under CRD. RO do not meet the CRD requirements.

Market development So far, Danske Bank has been the only issuer to tap the Euro Jumbo market with an SDO programme. The bank can issue covered bonds that are either secured by a pool of Danish mortgage loans or by a pool of international mortgage loans. We attribute the fact that we have not seen other banks tapping the Euro jumbo market with the dislocation of the capital markets and the fact that Denmark also has a functioning domestic covered bond market. The access to the domestic market has provided Danish issuers usually with more attractive funding opportunities than the Euro benchmark market. We still see good chances of a growing issuer base when market conditions normalise further.

Danish Covered Bonds – Rating Overview Issuer Portuguese Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch DANBNK AAA (S) Aaa (S) AAA (S) A+ (N) Aa3 (S) A+ (S)


Outstanding Danish CB By Issuer (Sep 09) Jumbo Danish CB Maturity Profile (Sep 09)

0

1

2

3

4

DANB

NK

EUR bn

0

1

2

2010 2011 2012 2013

€bn



Dutch Covered Bonds Legal basis Issuance of Dutch Covered Bonds started in 2005, based on contractual agreements in the absence of a specific legal framework. In the summer of 2008 a regulatory framework for the issuance of covered bonds was introduced. The Dutch regulation follows a principles based approach and does not contain detailed rules regarding eligible assets. Instead Netherlands-based banks can register their covered bonds with the Dutch Central Bank. The central bank will then asses whether the covered bonds provide a high degree of certainty that the obligations to bondholders may be met at all times. In doing so, the central bank looks at the cover assets as well as procedures of the issuing bank regarding the pledging of collateral during the life of the bonds. In addition, the central bank relies on credit ratings given to the covered bonds by recognised credit rating agencies. Registered covered bonds must be rated at least AA- (or equivalent) by a recognised rating agency. The central bank made it clear that a breach of the registration requirements (e.g. a downgrade below AA-), does not automatically lead to a de-registration (and thus loss of supervision) of the covered bonds. Instead, the issuer would be unable to issue new covered bonds until the central bank is of the opinion that the situation has improved.

Banks also have the possibility to issue covered bonds that are not registered with the central bank and therefore do not fall under the supervision of the central bank.

The issuers Dutch Covered Bonds are issued by the bank that also originates the cover assets. The cover assets are then assigned to a special entity, the Covered Bond Company (“CBC”). The assignment does not require notification of the mortgage borrower, which continues to make payments to the originating bank until notified of the transfer. The bank issues a senior unsecured bond, which is then guaranteed by CBC. Under the guarantee agreement, the CBC agrees to take over payments of interest and capital to the covered bondholders in the event of a default. Covered bondholders have full recourse against the bank, as well as a secured claim against CBC under the covered bond guarantee.

Cover assets As mentioned above, the regulatory framework does not contain any eligibility criteria for covered assets. It is thus up to the issuers to set out individual eligibility criteria in their covered bond programmes. So far, only Dutch residential mortgage loans have been used as collateral. A quarterly Asset Coverage Test (ACT) ensures that there is sufficient collateral for the outstanding covered bonds. Mortgage loans only count as collateral up to a loan-to-value ratio of 80%. Valuation of the underlying property is linked to a Dutch house price index. The total loan-to-foreclosure-value ratio of eligible loans is capped at 125% (Achmea, ING and SNS) or 130% (AAB). The ACT also provides for a minimum over-collateralisation, and considers potential set-off risk. A breach of the ACT does not constitute an issuer event of default, but would prevent the bank from issuing further covered bonds under the programme. If the breach is not remedied until the next calculation date, the transfer of the cover assets to the CBC will be completed.


The amount of substitution assets within the cover pool is capped at 10%. These assets include exposures to 0% risk-weighted public sector entities and central banks, as well as exposures to 10% risk-weighted institutions. Exposures to 20% risk-weighted institutions and AAA-rated RMBS tranches can also be used, but only if their share does not exceed 10% of the outstanding covered bonds.

Matching requirements Interest rate mismatches are hedged via a total return swap between the bank and CBC. Potential currency risks will be hedged via swaps with suitably rated counterparts. Swap counterparties need to be exchanged if their rating level falls below a specified level.

Programmes of AAB and ING allow for covered bond issuance with soft or hard bullet maturities, while ACHMEA and SNS only issue covered bonds with soft bullet maturities (1 year extension).

In its supervising role for registered covered bonds, the Dutch Central Bank determines a “healthy ratio” of covered bonds to disposable assets. While there is no explicit issuance limit for covered bonds (as it is the case in Canada), this regulation aims to ensure that the issuer has enough available assets on its balance sheet to honour the coverage requirements. At the same time, the central bank wants to prevent excessive over-collateralisation in order to protect unsecured creditors.

Post-bankruptcy procedures In the event of the issuer’s default, the transfer of mortgage assets to the CBC will be completed by notification of the mortgage borrowers. The CBC takes over payment of interest and capital to the covered bondholders as originally scheduled. In the event of the bank’s default, the ACT would be replaced by the amortisation test (AT), which is designed to ensure that the CBC can meet its obligations under the covered bond guarantee. A breach of the AT would result in a default of the CBC and acceleration of payments under the covered bond guarantee.

Covered bondholders have a residual claim against the issuer in the event that CBC cannot satisfy all claims under the covered bonds. The residual claims rank pari passu with other unsecured creditors of the issuer.

Risk weighting Registered Dutch Covered Bonds meet the requirements of Article 22(4) of the UCITS directive. However, it is up to the individual issuer to fulfil the requirements of CRD (mainly by the choice of cover assets). The mere fact that Dutch Covered Bonds are registered does not automatically lead to a preferential treatment under CRD.

Market development The introduction of the regulatory framework clearly increases the level of investor protection. So far AAB, ING and NIBC Bank NV have registered their existing programmes with the central bank. The re-opening of the covered bond market also led to resumed issuance activity in the Netherlands and we expect the market volume to grow further in the coming 12 to 18 months. Given that the number of potential new issuers to join the market is very limited, volume growth should be rather moderate.


Dutch Covered Bonds – Rating Overview Issuer Dutch Covered Bonds Unsecured Debt


AAB AAA (S) Aaa (S) AAA (S) A+ (S) Aa3 (N) AA- (S)ACHMEA AAA (S) Aa2 (N) n.a. A- (S) n.a. n.a.INTNED AAA (S) Aaa (S) AAA (S) A+ (S) Aa3 (N) A+ (S)NIBCAP AAA (S) n.a. AAA (S) BBB (N) Baa2 (N) BBB (S)SNSSNS AAA (S) Aaa (S) AAA (S) A (N) A2 (S) A (N)Source - S&P, Moody’s, Fitch (S) = stable, (P) = Positive, (N) = Negative, (D) = Developing

Total Outstanding Jumbo CB Outstanding Jumbo CB By Issuer (Sep 09)

0

2

4

6

8

10

12

14

16

18

20

2005 2006 2007 2008 Sep-09

EUR bn

0

1

2

3

4

5

6

7

8

9

10

AAB

INTN

ED

ACHM

EA

EUR bn


Jumbo CB Gross Issuance Jumbo Dutch CB Maturity Profile (Sep 09)

0

1

2

3

4

5

6

2005 2006 2007 2008 Sep-09

€bn

0

0.5

1

1.5

2

2.5

3

3.5

4

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

€bn



Finnish Covered Bonds Legal basis Finnish Covered Bonds (FCB) are issued on the basis of the Act on Mortgage Credit Banks from December 1999. The law is supplemented by a regulation issued by the Finnish Financial Supervision Authority in March 2003.

The issuers FCB can only be issued by so-called mortgage credit banks. The business activities of mortgage credit banks are limited by law to mortgage and public sector lending, as well as the issuance of FCB.

Cover assets FCB can either be secured by public sector debt or mortgage loans. Each asset class is kept in its own cover pool for which a separate register has to be maintained. Mortgages can only be used as collateral up to an LTV of 60%. The share of commercial mortgages within the cover pool is limited to 10% of the total pool. Mortgage credit banks are allowed to grant mortgage loans up to a total LTV limit of 100%. However, only 16.7% of the bank’s total mortgage portfolio is allowed to have an LTV higher than 60%. Public sector collateral can consist of debt from the Finnish Central Government and central governments of states with comparable risk; it can also consist of debt from Finnish municipalities and other municipalities of a state belonging to the EEA which is comparable with Finnish municipalities, as well as claims on the Bank of Finland and the European Communities.

Substitute collateral consisting of bonds or debt obligations from public sector entities which are also eligible as ordinary collateral, as well as debt from banks which are outside the consolidation group of the issuer may temporarily be used as collateral for FCB up to a maximum of 20%. Derivatives used for hedging purposes can also be included in the cover pool. The Finnish framework does not provide for an independent cover monitor.

Matching requirements The covered bond framework requires nominal and net present value matching. The total amount of interest receivable from the cover pool within a 12 month period must be higher than the total amount of interest payable on the outstanding covered bonds within the same period. Currency risks have to be hedged.

Post-bankruptcy procedures Covered bondholders have a preferential claim from the proceeds of the cover pool in the event of the issuer’s bankruptcy. Cover pools and covered bonds are split from the issuer’s balance sheet in the event of its bankruptcy and run independently. FCB do not accelerate in the event of the issuer’s bankruptcy.

Claims of covered bondholders that cannot be satisfied from the cover pool rank pari passu with unsecured claims against the issuer.


Risk weighting FCB meet the requirements of Article 22(4) of the UCITS directive. In addition, FCB meet the requirements of the CRD provided that non-guaranteed bank debt does not exceed 15% of the cover pool and thus qualify for a preferential risk weighting under CRD.

Market development While Aktia Real Estate Mortgage Bank (AKTIA) re-opened the Finish covered bond market in June 2009 with its so far largest transaction (€600mn), issuance in jumbo style covered bonds has remained quiet since May 2008. Currently, OP Mortgage Bank (OPMBK) and Sampo Housing Loan Bank (SHAMPO) are the only issuers that have Jumbo covered bonds outstanding. However, since SHAMPO was acquired by Danske Bank, it has not issued any further Jumbo covered bonds, leaving the market with only one active Jumbo issuer. All banks have chosen to employ structural enhancements for their covered bond programmes, such as excluding commercial mortgages from the cover pool or providing a certain level of minimum over-collateralisation (AKTIA: 4%, OPMB: 5%, SHAMPO: 5%). In addition, covered bonds issued by OPMB and SHAMPO have a 12-month maturity extension (soft bullet repayment).

Finnish Covered Bonds – Rating Overview Issuer Finnish Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch AKTIA n.a. Aa1 (S) n.a. n.a. A1 (S)* n.a.

OPMBK AAA (S) Aaa (S) n.a. AA- (S)* Aa1 (N)* AA- (N)*

SHAMPO n.a. Aaa (S) n.a. A+ (N)* A1 (S)* n.a.

Source - S&P, Moody’s, Fitch (S) = stable, (P) = Positive, (N) = Negative, *) Parent rating

Outstanding Finnish CB By Issuer (Sep 09) Jumbo Finnish CB Maturity Profile (Sep 09)

0

1

2

3

SHAM

PO

OPMB

K

EUR bn

0

1

2

2010 2011 2012

€bn



French Obligations Foncières Legal basis In 1999, France introduced a legal framework for the issuance of covered bonds, called Obligations Foncières (OF). The law was amended in 2001 with the main changes being the geographical expansion of the cover assets outside the European Economic Area and the acceptance of public sector bonds (in addition to loans) as collateral. In 2007, the framework was amended once more, increasing the maximum of prêts cautionnés (guaranteed home loans) within the cover pool to 35% from 20%, amending revaluation criteria as well as aligning some collateral restrictions with CRD requirements. The legal framework for OF is expected to be amended again in the coming months. The main changes will aim at increasing investor protection as well as bringing the issuance of French covered bonds with a higher share of guaranteed home loans than 35% under one legal framework.

The issuers Obligations Foncières can only be issued by specialised credit institutions (Société de Crédit Foncier, SCF) the business activities of which are restricted by law. Business activities are limited to mortgage and public sector lending as well as the issuance of covered bonds and other non-preferred (i.e., unsecured) debt. As a result of this very strict special bank principle, all assets on the SCF’s balance sheet are cover assets. The specialised character of the SCF is further underlined by the fact that the issuer usually does not have its own staff, but is managed by its parent company. The parent company, which has to be a bank, is also conducting the asset origination for the SCF. The assets are then transferred to the SCF which funds them through the issuance of OF. The transfer of mortgage assets from the parent bank to the SCF is facilitated by the fact that, under French law, the transfer does not require a change in the land registry or even the notification of the mortgagee. The SCF is under the special supervision of the Commission Bancaire which ensures that the SCF is in compliance with the covered bond framework.

Cover assets Obligations Foncières can be collateralised by mortgages, public sector debt and mortgage backed securities (MBS). MBS are only eligible as collateral if at least 90% of the underlying assets meet the eligibility criteria for OF. There are no separate cover pools for the respective asset classes. Thus, OF can be secured by a mix of public and mortgage assets as well as ABS/MBS. An independent cover monitor (Controlleur Specifique) ensures that the SCF adheres at all times to the requirements for the covered bond framework. The monitor reports directly to the banking commission.

Generally, mortgages with a maximum LTV ratio of 60% are eligible as collateral. If all mortgages held by the SCF are residential mortgages, a maximum LTV ratio of 80% applies. Mortgages can have a 100% LTV ratio if they benefit from a guarantee from the Fonds de Garantie de l’Accession Sociale (FGAS), which is equivalent to a public sector guarantee. With the exception of the publicly guaranteed mortgages, SCF are not allowed to hold mortgages with an LTV ratio higher than 80%, even if they are partly


refinanced with unsecured debt. Geographically, the range of eligible mortgages is limited to the EEA, Switzerland, USA, Canada, Japan and French overseas territories.

The valuation of mortgages used as collateral has to take into account the long-term lasting characteristics of the building, normal and local market conditions as well as the current and possible alternative use of the property.

Loans and bonds issued or guaranteed by central and regional governments within the EEA, Switzerland, USA, Canada, Japan and the French overseas territories qualify as public sector collateral for OF. Public sector bonds must be acquired with the intention of holding them until maturity. The French framework allows ABS and MBS to be included in the collateral if at least 90% of the underlying assets consist of eligible mortgage or public sector debt. The ABS/MBS must be issued under the law of a state belonging to the EEA, Switzerland, USA, Canada or Japan.

Substitution assets are limited to securities, which are eligible for repo with the ECB. The share of substitution assets within all cover assets must not be greater than 15%.

Matching requirements The French covered bond law contains relatively basic asset-liability matching (ALM) requirements. The amount of assets on the balance sheet of the SCF always has to be higher than the total amount of outstanding OF. The law does not specify how much over-collateral is required. Other matching requirements like interest rate, currency, duration or NPV matching are not included in Covered Bonds law. In order to increase investor confidence and support their covered bond ratings, all issuers have implemented additional ALM restrictions on a contractual basis. Such commitments include interest and currency matching, and NPV matching, voluntary over-collateralisation as well as liquidity support through cash tranches or liquidity lines with the parent company.

Post-bankruptcy procedures In the event of the issuer’s insolvency, the assets will be used to make interest and capital payments to the covered bondholders. There is no split of assets from the issuer’s balance sheet: therefore, the whole issuer will become “static”. Other creditors of the SCF will have no access to the assets as long as there are OF outstanding. If the assets on the balance sheet of the issuer are not sufficient to cover all claims of the covered bondholders, they have no further claim against the parent company of the SCF. However, there is a high probability that the French Banking Commission will urge the parent companies to support its banking subsidiaries.

Risk weighting French OF meet the requirements of Article 22(4) of the UCITS directive and benefit from a 10% risk weighting in most EU countries. Although CRD limits the use of ABS/MBS to a maximum of 20% within the collateral pool, OF will be CRD compliant at least until the end of 2010. Before the end of the transition period, the treatment of 100% ABS/MBS in the collateral pool will be renegotiated.


Market development The French OF market has seen significant growth since the beginning of 2008. What was for many years a market with three issuers, has grown to a market with seven issuers within a comparatively short period of time. The significantly broader issuer base should lead to noticeable growth of the OF market in the coming years. Already during the first nine months of 2009, Jumbo OF issuance has surpassed Pfandbrief issuance.

French Obligations Foncières – Rating Overview Issuer Obligations Foncières Unsecured Debt Of Parent


BNPSCF AAA (S) Aaa (S) AAA (S) AA (N) Aa1 (N) AA (N)

CFF AAA (S) Aaa (S) AAA (S) A (S) Aa3 (S) A+ (S)

CIFEUR n.a. Aaa (S) AAA (S) n.a. n.a. n.a.

DEXMA AAA (S) Aaa (S) AAA (S) A (S) A1 (N) A+ (S)

GESCF AAA (S) Aaa (S) n.a. AA+ (S) Aa2 (S) n.a.

SOCGEN AAA (S) Aaa (S) AAA (S) A+ (S) Aa2 (N) A+ (S)


Total Outstanding Jumbo OF Outstanding Jumbo OF By Issuer (Sep 09)

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-09

EUR bn

0

5

10

15

20

25

30

35

40

45

CFF

DEXM

A

CIFE

UR

SOCG

EN

BNPS

CF

GESC

F

EUR bn


Jumbo OF Gross Issuance Jumbo OF Maturity Profile (Sep 09)

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-09

€bn

02468

10121416

2010

2012

2014

2016

2018

2020

2022

2024

2026

2031

2055

€bn



French Covered Bonds Legal basis Despite the existence of a dedicated covered bond law (see Obligations Foncières), several banks have established covered bond programmes which largely rely on contractual agreements. Segregation of collateral assets is based on the European Collateral Directive which has been transposed into the French Monetary and Financial Code. The main reasons for the use of individually structured programmes are the greater flexibility in asset selection (no limit of guaranteed home loans) and the possibility of implementing more complex originator-group structures without the need to “physically” pool the mortgages within a single entity.

The issuers Since the opening of this market segment in 2006, five banks or banking groups (BNP Paribas, Banque Federative du Crédit Mutuel, Banque Fédérale des Banques Populaires, Caisse Nationale des Caisses d’Epargne and Credit Agricole) have established covered bond programmes, which are not based on the OF framework in France. In all cases, the covered bond issuer is not identical with the originator of the real estate loans (a feature that is also present in the Obligations Foncières sector). The issuing entities are specialised credit institutions subject to the supervision of Banque de France. The issuers are intended to be ring-fenced, bankruptcy-remote entities that will be unaffected by the insolvency of the sponsor bank.

The main purpose of the issuer is to make advances to the originator or sponsor bank and finance these advances through the issuance of covered bonds. Payments to the covered bondholders are made on the basis of the amounts the issuer receives from the sponsor bank (or the cover pool in the event of a sponsor bank’s default) under the advance agreement. The covered bonds represent limited recourse obligations of the issuer. The secured claims under the advance agreement constitute a full recourse obligation of the sponsor bank.

Cover assets The collateral for the covered bonds, granted through the secured advances, can consist of home loans and substitution assets. The home loans need to be secured either by a mortgage or a guarantee from either Crédit Logement (in case of BNPPCB), Cautionnement Mutuel de l’Habitat (in the case of CMCICB), SOCAMI or CASDEN (in the case of BPCOV), SACCEF (in the case of CDEE), Crédit Logement or CAMA (in the case of ACACB) or another EEA-based credit institution specialised in the guaranteeing of loans, subject to rating affirmation or notification of the covered bonds.

Only home loans that are used to finance residential property are eligible as collateral. The loan to value (LTV) ratio of the home loan must not be higher than 100%. The underlying property has to be located in the jurisdiction of the home loan originator. The outstanding principal balance of the home loan must not be greater than €1mn, and the loan must have a monthly or quarterly amortisation structure. The remaining term of the loan has to be less than 30 years, with at least one loan payment made. The loan must not be in arrears, and the borrower must not have any contractual right of set-off.


On a monthly basis, an Asset Cover Test (ACT) will be conducted to ensure that there is sufficient collateral in the cover pool to secure the outstanding covered bonds. Home loans in the cover pool are only considered with a value of up to 80% of the value of the underlying property. The valuation of the underlying property is linked to the PERVAL residential house price index (ACACB, BNPPCB and CMCICB) or the INSEE index (CDEE and BPCOV). Only 80% of increases in the house price index are considered, while decreases of the index count in full. The ACT will also provide for a certain level of minimum over-collateralisation (7.5%). The level of minimum over-collateralisation will be reviewed on a quarterly basis and, if necessary, adjusted upwards in order to compensate for potentially deteriorating asset quality. Loans in arrears or which cease to comply with any other eligibility criteria, do not count in the ACT.

If the ACT is not passed, the sponsor bank has to add additional collateral accordingly. In the case that the ACT is not passed on the following test date, a borrower’s event of default occurs which enables the issuer to enforce its security in the cover pool. While the breach of the ACT does not lead to an issuer event of default, it prevents the issuer from issuing further covered bonds.

Matching requirements At an initial stage there will be no hedging at the issuer level. Hedging of interest rate and currency mismatches will be conducted within the general treasury and hedging operations of the sponsor bank. Since the payments received by the issuer under the borrower facility match the payments to the covered bondholders, the issuer is not exposed to any currency or interest rate risk. This can change if the issuer has to enforce its security in the cover assets, which will result in the issuer receiving unmatched payments from the cover pool. In order to avoid such a scenario, the issuer has to enter into a series of swaps in order to hedge currency and interest rate risk once the rating of the sponsor bank falls below a certain level. In order to match the cash flows from these swaps, the issuer will enter into back-to-back swaps with the sponsor bank. If the issuer has to enforce its security, it has the right to cancel the back-to-back swaps with the sponsor bank at no cost, leaving it only with the swap agreements it has entered to hedge the cash flows arising from the collateral.

Post-bankruptcy procedures In the event of a default of the sponsor bank, the issuer has the right to enforce its security interest in the cover pool. The outstanding covered bonds will not automatically accelerate in such a scenario. The issuer will use the cash flows, which are hedged by the swap agreements mentioned above, to continue to make payments to the covered bondholders. With the borrower’s event of default, substitution of collateral assets stops and the pool becomes static. Liquidity needed to repay maturing covered bonds will most likely have to be raised by selling or securitising cover assets.

A monthly amortisation test (AT) will replace the ACT. Within the AT, a check is carried out to see whether the collateral is still sufficient to repay all outstanding covered bonds. If the AT is not passed and the non-compliance is not remedied until the next test date, an issuer event of default occurs and the outstanding covered bonds accelerate.


Risk weighting French Covered Bonds which are not based on the framework of Obligations Foncières do not meet the requirements of Article 22(4) of the UCITS directive, and thus do not benefit from a preferential treatment in terms of their risk weighting in the EU.

Market development Since BNPPCB issued its first covered bond in December 2006, the market of non-OF covered bonds has grown to a total volume of €29bn. Within the French Jumbo market, these covered bonds hold a market share of 24% as of September 2009. The growth in market share is remarkable since the OF market has also shown significant growth during the last 18 months.

The planned regulatory changes should help to further increase market acceptance of non-OF covered bonds, especially if compliance with Article 22(4) of UCITS can be achieved.

French Covered Bonds – Rating Overview Issuer Obligations Foncières Sponsor Bank Rating


ACACB AAA (S) Aaa (S) AAA (S) AA- (N) Aa1 (N) AA- (S)

BNPPCB AAA (S) Aaa (S) AAA (S) AA (N) Aa1 (N) AA (N)

BPCOV AAA (S) Aaa (S) n.a. n.a. n.a. n.a.

CDEE AAA (S) Aaa (S) n.a. A+ (S) Aa3 (S) A+ (S)

CMCICB AAA (S) Aaa (S) AAA (S) A+ (S) Aa3 (S) AA- (S)


Outstanding French CB By Issuer (Sep 09) Jumbo French CB Maturity Profile (Sep 09)

0

5

10

15

20

BNPP

CB

CMCI

CB

BPCO

V

ACAC

B

CDEE

EUR bn

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014 2015 2016

€bn



Caisse de Refinancement de l’Habitat Legal basis Caisse de Refinancement de l’Habitat (CRH) issues collateralised bonds with a minimum over-collateralisation of 25%. Its issue activity is governed by the Articles L. 313-42 to L. 313-49 of the French Monetary and Financial Code. The selection of mortgage assets used as collateral is governed by Article 515-14, which is also part of the legal framework of Obligations Foncières.

The issuer CRH is established as a Société Financière and is subject to French banking law and supervision by the Commission Bancaire. Its sole purpose is to refinance housing loans granted by its shareholders, which consist of a group of 20 financial institutions. For this purpose, CRH buys discountable bills (“billets de mobilisation” or “BDM”) from its shareholders and issues bonds in the capital markets. The BDMs are secured by residential mortgage loans which remain on the balance sheet of the respective shareholder. The shareholders are responsible for the solvency of CRH and have to make liquidity advances of up to 5% of the funding volume they conduct via CRH.

Cover assets The collateral for the BDMs consists of a dynamic pool of residential mortgage loans and guaranteed housing loans (“prêts cautionnés”) on the balance sheet of the shareholder. The share of prêts cautionnés within the cover pool is limited to 35% (same as with Obligations Foncières). The maximum LTV ratio is limited to 90%. The geographical range of underlying properties is limited to the EU. Senior tranches of securitisation transactions (i.e., MBS) are also eligible if at least 90% of the underlying assets are also directly eligible. So far, senior tranches of securitisations have not been used as collateral by CRH. CRH monitors the underlying collateral through audits that it conducts at least once every two years.

Matching requirements There is a full matching between the bonds issued by CRH and the underlying BDMs. Matching between the property loan portfolio and the respective BDMs is conducted through the general balance sheet management of the bank that sold the BDMs to CRH. The property loan portfolio has to cover at least 125% of the value of the outstanding BDMs. In the case of property loans with variable rates, CRH requires a collateralisation of 150%.

Post-bankruptcy procedures In the event of a default of one of the shareholders on their BDMs, CRH automatically becomes the owner of the pledged collateral. The collateral assets would then be sold to another shareholder and CRH would buy back an equivalent part of its outstanding bonds. CRH solvency is supported by its shareholders


Risk weighting CRH Bonds meet the requirements of Article 22(4) of the UCITS directive and qualify for preferential treatment under CRD.

Market development As of December 2008, CRH had bonds outstanding with a total volume in excess of €38bn. Most of the funding is conducted in benchmark form with frequent tapping of outstanding bonds. In two cases, CRH bonds have reached an outstanding volume of around €5bn each. The fact that several French banks, among them many shareholders of CRH, have recently established their own covered bond programmes had so far no significant impact on CRH’s issuance activity. CRH provides a straightforward and low-cost funding alternative for its shareholders that can also be complementary to direct covered bond issuance of these institutions.


German Pfandbriefe Legal basis German Pfandbriefe are issued on the basis of the German Pfandbrief Act which came into effect on 19 July 2005. The Pfandbrief Act replaced a number of covered bond laws which had been in place for several issuer groups, namely specialised mortgage banks, public sector banks and ship-mortgage banks. The Pfandbrief Act was amended in May 2009, allowing for the first time the issuance of Pfandbriefe secured by aircraft financing loans.

The issuers The Pfandbrief Act allows every German bank, which has received a special license, to issue Pfandbriefe. Until July 2005 German Pfandbrief issuers were subject to the special bank principle. In order to receive a Pfandbrief issuing license, issuers have to fulfil certain minimum standards, such as a core capitalisation of at least €25mn or adequate systems to manage the risks inherent in the cover pools and the Pfandbrief issuing business. The German Pfandbrief Act contains detailed reporting requirements for the issuers. On a quarterly basis, information on the composition of the cover pools is published, including a regional breakdown of assets, maturity profile and over-collateralisation of the outstanding Pfandbriefe.

Cover assets Pfandbriefe can be collateralised by public sector debt, mortgages, ship mortgages or aircraft loans. The cover assets are held in separate collateral pools (one for each collateral type) on the balance sheet of the issuer. A separate register has to be kept for each pool, and an independent cover pool monitor checks the registers and ensures that there is always sufficient collateral for the outstanding Pfandbriefe. The cover pool monitor reports directly to the German Banking supervisory authority (Bafin).

Depending on the type of collateral used, Public Pfandbriefe, Mortgage Pfandbriefe, Ship Mortgage Pfandbriefe or Aircraft Pfandbriefe are issued to fund these assets.

Mortgage loans only count as collateral up to a loan-to-value ratio of 60%. Both residential and commercial mortgages from the EU, EEA, Switzerland, the US, Canada and Japan qualify as collateral for Mortgage Pfandbriefe. Mortgages from outside the EU must not account for more than 10% of the collateral pool unless the preferential claim of the Pfandbrief holder is acknowledged in that country.

Public sector collateral can consist of loans and bonds issued or guaranteed by public sector entities within the EU, EEA, Switzerland, the US, Canada and Japan qualify as collateral for Public Pfandbriefe. The 10% limit for non-EU assets applies accordingly. Non-EU/EEA assets must fulfil credit quality step 1 of the European Capital Requirement Directive (i.e. a minimum rating of AA-/Aa3). In case of a downgrade of these assets to a level between A+/A1 and A-/A3 (i.e. credit quality step 2) the assets can stay in the cover pool if they do not exceed 20% of the value of outstanding Public Sector Pfandbriefe.


Ship mortgage loans only count as collateral up to a loan-to-value ratio of 60%. The underlying ships have to be recorded in a public register. Eligible ship mortgage loans must not have a maturity in excess of 15 years. Geographically, ship mortgage loans are limited by the country in which the ship is registered. Mortgage loans on ships which are registered in non-EU countries where the preferential claim of the Pfandbrief holder is not recognised is limited to a maximum of 20% of loans where the preferential claim is recognised. All ships need to be insured for an amount which represents at least 120% of the outstanding mortgage loan.

Aircraft loans used as Pfandbrief collateral have to be secured by a registered mortgage or a similar security claim on the aircraft financed by the loan. The loan is eligible as Pfandbrief collateral up to 60% of the value of the aircraft. The age of the aircraft must not exceed 20 years. For the duration of the loan, the aircraft has to be insured for at least 110% of the outstanding loan amount. Loans secured by aircraft registered outside the EU, where the preferential claim of the Pfandbrief holder is not recognised, must not account for more than 20% of the cover pool.

Public sector, mortgage, ship mortgage and aircraft cover pools may also contain substitute collateral up to a maximum of 10%. Substitute collateral can consist of liquid, high-quality assets such as debt from the ECB or other central banks within the EU, as well as other suitable credit institutions. Mortgage, ship mortgage and aircraft cover pools can contain substitute collateral of up to 20% if the latter consists of bonds meeting requirements for Public Sector collateral.

Hedging contracts such as swaps, can also be included in the collateral pool, but must not account for more than 12% of the net present value of the collateral pool.

Matching requirements The German Pfandbrief framework contains specific provisions about the limitation of interest rate and currency risks. The issuer must ensure that the net present value coverage of the Pfandbriefe is also maintained under a stress scenario which includes shifts of the yield curve and changes in the currency positions. Nominal volume and payable interest of the outstanding Pfandbrief must always be covered by the nominal volume and interest income from the cover assets. In addition, the Pfandbrief Act requires a minimum over-collateralisation of 2% on a net present value basis.

The amendment of May 2009 introduced for the first time a mandatory liquidity buffer to be held within each cover pool. The buffer has to cover cumulative liquidity shortfalls or mismatches between the cover pool and the outstanding covered bonds for a period of 180 days. The buffer has to consist of liquid public sector assets and ECB eligible assets. It is not necessary to provide cash as a liquidity buffer.

Post-bankruptcy procedures In the event of the issuer’s bankruptcy, the Pfandbriefe and pertaining cover pools are split from the issuer’s balance sheet. There is no automatic acceleration of payments. A special cover pool administrator is appointed to take over the management of the stand-alone pool and outstanding Pfandbriefe. He can engage in bridge financing to close liquidity gaps as well


as transferring the cover pool and the Pfandbriefe to another bank upon which the pool can become dynamic again. The duties of the cover pool monitor are not affected by the bankruptcy of the issuer. Claims of covered bondholders that were not satisfied from the cover pools rank pari passu with the unsecured creditors.

Risk weighting German Pfandbriefe meet the requirements of Article 22(4) of the UCITS directive, as well as the CRD requirements, and qualify for a preferential treatment under CRD.

Market development Despite several years of shrinking market volume, the German Pfandbrief market is still the largest covered bond market in the world. Reduced issuance of Public Sector Pfandbriefe and high volumes of maturing bonds are the main drivers of the shrinking market share.

German Pfandbriefe were the first covered bonds to be issued in Jumbo format, creating a new market segment in 1995. Despite the rapid growth of Jumbo issuance in the late 1990s, the traditional Pfandbrief segment continued to play an important part and represents approximately two thirds of the total Pfandbrief market. Jumbo issuance peaked in 1999 and has declined since then, especially due to lower Public Sector Pfandbrief issuance. Issuance of Mortgage Pfandbrief has been increasing, but not sufficiently to offset the decline in Public Sector Pfandbriefe. As a result, the amount of outstanding Pfandbriefe is shrinking. While Ship Mortgage Pfandbriefe have been issued before, the first Jumbo Ship Mortgage Pfandbrief was only issued at the beginning of 2008. So far, Pfandbriefe secured by aircraft loans have not been issued. Issuance in this sector will start most likely in 2010, but is expected to remain a nice product.


German Pfandbriefe – Rating Overview Issuer Public Sector Pfandbriefe Mortgage Pfandbriefe Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch S&P Moody’s Fitch AARB n.a. n.a. AAA (S) n.a. n.a. AAA (S) n.a. n.a. A- (S) BHH n.a. Aaa (S) AAA (S) n.a. Aa1 (S) AA+ (S) n.a. n.a. A+ (S) BYLAN withdrawn Aaa (S) AAA (S) withdrawn Aaa (S) AAA (S) BBB+ (N) A1 (S) A+ (S) COREAL withdrawn withdrawn AAA (S) withdrawn withdrawn AA- (S) withdrawn withdrawn BBB- (S) DB n.a. n.a. n.a. AAA (S) Aaa (S) n.a. A+ (S) Aa1 (N) AA- (N) DEKA AAA (S) Aaa (S) n.a. n.a. n.a. n.a. A (S) Aa2 (S) n.a. DEXGRP AAA (S) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. DGHYP AAA (S) n.a. AAA (S) AAA (S) n.a. AAA (S) A (N) n.a. A+ (S) DHY withdrawn Aaa (S) n.a. n.a. Aaa (S) n.a. n.a. Aa3 (S) n.a. DKRED n.a. Aaa (S) n.a. n.a. n.a. n.a. n.a. n.a. n.a. DPB n.a. n.a. n.a. AAA (S) Aaa (S) AAA (S) A- (P) Aa3 (N) A+ (S) DUSHYP AAA (S) n.a. AAA (N) n.a. n.a. n.a. n.a. n.a. A- (N) EURHYP AAA (S) Aaa (S) AAA (S) AAA (S) Aaa (S) AAA (S) A- (N) A1 (N) A (N) HESLAN AAA (S) Aaa (S) AAA (S) n.a. n.a. AAA (S) A (N) Aa2 (S) A+ (S) HSHN n.a. Aaa (S) n.a. n.a. n.a. n.a. BBB+ (N) A2 (S) A (S) HVB AAA (S) Aaa (S) AAA (S) n.a. Aa1 (P) AAA (S) A (S) A1 (S) A+ (S) HYPORE AAA (N) Aaa (N) AAA (N) AAA (N) Aa3 (N) AA+ (N) BBB (P) A3 (N) A- (S) LBBER n.a. n.a. AAA (S) n.a. n.a. AAA (S) n.a. n.a. AA- (S) LBW AAA (S) Aaa (S) AAA (S) n.a. Aaa (S) n.a. A- (N) Aa2 (N) A+ (S) MUNHYP n.a. Aaa (S) n.a. n.a. Aaa (S) n.a. n.a. Aa3 (N) A+ (S) NDB n.a. Aaa (S) n.a. n.a. Aaa (S) n.a. A- (N) Aa2 (S) A (S) SEBAG n.a. Aaa (N) n.a. n.a. Aaa (N) n.a. n.a. Baa1 (N) n.a. WARHYP n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. WESTIB n.a. n.a. n.a. AAA (S) n.a. n.a. BBB+ (N) n.a. n.a. WESTLB AAA (S) Aaa (S) n.a. n.a. n.a. n.a. BBB+ (N) A2 (N) A- (N) WLBANK AAA (S) n.a. n.a. AAA (S) n.a. n.a. A+ (S) n.a. A+ (S)

Source – S&P, Moody’s, Fitch (S) = stable, (P) = Positive, (N) = Negative, (D) = Developing, *) non-guaranteed rating


Total Outstanding Jumbo Pfandbriefe Outstanding Jumbo Pfandbriefe By Issuer (Sep 09)

0

50

100

150

200

250

300

350

400

450

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-09

MPPP

EUR bn

0

10

20

30

40

50

60

EURH

YP

HYPO

RE LBW

DGHY

P

HVB

BHH

BYLA

N

CORE

AL

MUNH

YP

WLB

ANK

DEXG

RP DHY

SEBA

G

DPB

NDB

DEKA

WES

TLB

DUSH

YP

AARB

DKRE

D

HSHN

WES

TIB DB

LBBE

R

Ship Pfand.MortgagePublic

EUR bn


Jumbo Pfandbrief Gross Issuance Jumbo Pfandbrief Maturity Profile (Sep 09)

0

20

40

60

80

100

120

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-09

Ship PfandMortg. Pfand.Publ. Pfand.

€bn

0

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Ship Pfand.Mortg. Pfand.Publ. Pfand.

€bn



Hungarian Covered Bonds Legal basis Hungarian Covered Bonds are issued on the basis of Act No. XXX of 1997 on Mortgages Banks and Mortgage Bonds. The legal framework is complemented by several ministerial decrees that regulate technical procedures.

The issuers Issuers of Hungarian Covered Bonds are subject to a special bank principle. Their activities are limited to mortgage lending within Hungary and the EEA as well as issuance of covered bonds. The amount of mortgage loans originated in the EEA must not exceed 15% of the total loan portfolio. Hungarian mortgage banks are not allowed to take deposits. The incorporation of a mortgage bank requires registered capital of at least 3bn Hungarian Forints.

Cover assets Cover assets can consist of commercial and residential mortgage loans originated in Hungary as well as the EEA. Residential mortgage loans count as collateral up to a LTV level of 70%, while commercial mortgages only count as collateral up to 60%. Substitute collateral can consist of liquid assets, such as cash or government bonds, and is limited to 20% of the cover assets. Derivatives used for hedging purposes can be used as collateral as well, but must not exceed 12% of the net present value of the cover assets. A coverage supervisor is appointed by the mortgage bank and approved by the Hungarian FSA (HFSA). The coverage supervisor is responsible for monitoring compliance with the coverage requirements.

Matching requirements The nominal value of cover assets always has to exceed the nominal value of outstanding covered bonds. In addition, there is a NPV coverage requirement. Currency mismatches between cover assets and outstanding covered bonds need to be hedged. There is no limit on interest rate or maturity mismatches; however loan portfolios of Hungarian mortgage banks need to hold a share of 80% or more of mortgage loans with a maturity of 5y or longer at the time of origination.

Post-bankruptcy procedures In the case of a liquidation of a mortgage bank, covered bondholders have a preferential claim from the proceeds of the cover assets. Payments in relation to the outstanding covered bonds do not accelerate. A specific cover pool administrator will be appointed by the court. The administrator will satisfy the claims arising from the covered bonds using the cover assets. The administrator has the exclusive right to sell cover assets.

Alternatively to the above procedure, outstanding covered bonds and cover assets can be transferred to another mortgage bank if the issuer is to be liquidated. The transfer requires the permission of the HFSA.


Risk weighting Hungarian covered bonds meet the requirements of Article 22(4) of the UCITS directive, as well as the CRD requirements, and qualify for a preferential treatment under CRD.

Market development The first and so far only Jumbo covered bond issued by a Hungarian issuer came to the market in 2008. There are currently three issuers of Hungarian covered bonds contributing to an approximate total market volume of €7.5bn. The largest part of Hungarian covered bonds (approx. 60%) is denominated in Forint, while the rest of outstanding covered bonds is mostly denominated in Euros.

Hungarian Covered Bonds – Rating Overview Issuer Hungarian Covered Bonds Unsecured Debt


FHBHU n.a. A3 (S) n.a. n.a. Baa3 (N) n.a.

OTP n.a. A2 (S) n.a. BB+ (N) Baa1 (N) n.a.

UCJB n.a. A3 (S) n.a. n.a. n.a. n.a.



Irish Asset Covered Securities Legal basis Irish Asset Covered Securities (ACS) are issued on the basis of the Asset Covered Securities Bill, which was enacted in 2001. The law is supplemented by a set of side regulations issued by the Central Bank of Ireland. The side regulations contain provisions such as matching requirements, qualification of the cover asset monitor as well as valuation criteria for mortgage assets. In 2007, the framework was amended, mainly to achieve compliance with CRD regulations. In addition, the geographical range of eligible assets was broadened and ACS covered by commercial mortgages were introduced.

The issuers Issuers of Irish ACS, so called “Designated Credit Institutions”, are subject to a special bank principle and are specially licensed by the central bank. This means that their business activities are limited mainly to public sector and mortgage lending, as well as the issuance of covered bonds. Typically, the covered bond issuer acts as the funding subsidiary of its parent company, which also requires a banking license.

Cover assets Irish ACS can be collateralised either by residential mortgages, commercial mortgages or by public sector debt. The assets are held in separate collateral pools. Depending on the type of collateral used, either Residential Mortgage ACS, Commercial Mortgage ACS or Public ACS are issued to fund these assets. Residential Mortgages used as collateral must not exceed a LTV of 75% while commercial mortgages are limited at a LTV of 60%. A residential mortgage cover pool must consist of at least 90% residential mortgages, allowing a maximum of 10% of commercial mortgages. Both issuers of Mortgage ACS (AIB and BKIR) have restricted themselves to using only residential mortgages as collateral. Valuation of residential mortgages is based on the market value at the time of inclusion in the cover pool. Revaluation of existing mortgages in the pool can be index-linked.

Debt issued or guaranteed by public entities within the EEA, Canada, the US, Switzerland, Australia, New Zealand and Japan is eligible as collateral for Public ACS. The 15% limit on non-EEA assets within the pool was dropped within the amendment of 2007. The same geographic restriction applies to collateral for Mortgage ACS. Securitised public sector and mortgage collateral (i.e., ABS/MBS) is also eligible as collateral. Substitute collateral, consisting mainly of high quality liquid public sector assets, is limited to 15%.

An independent Cover Asset Monitor (CAM) monitors the issuer’s compliance with the coverage requirements and other provisions of the covered bond framework. He reports any breach of coverage requirements directly to the central bank. As a unique feature, the CAM also ensures that the issuer maintains voluntary over-collateral, to which the issuer may have publicly committed itself. Derivatives used for hedging purposes can also be included in the cover pool.


Matching requirements With the amendment of 2007, a mandatory minimum over-collateralisation of 3% was introduced. Interest arising from the cover assets within a twelve month period needs to be at least as high as interest payable on outstanding ACS in the same period. Currency mismatches have to be hedged. The ACS framework also provides for a duration matching and an interest rate stress test aiming to limit interest rate mismatches.

Post-bankruptcy procedures In the event of the issuer’s bankruptcy, the cover pool and the covered bonds are split from the balance sheet. Outstanding covered bonds do not accelerate and covered bondholders continue to receive interest and capital payments as scheduled. The National Treasury Management Agency (NTMA) will appoint a qualified person or organisation that will take over the management of the cover pools. If such a person cannot be found, the NTMA itself will take over the management of the cover pool. Claims of covered bondholders which are not satisfied from the cover pools rank pari passu with the unsecured creditors.

Risk weighting Irish ACS meet the requirements of Article 22(4) of the UCITS directive as well as the CRD requirements, and qualify for a preferential treatment under CRD.

Market development 2009 saw the first issuance of Irish Commercial Mortgage ACS. The bonds were issued by Anglo Irish Mortgage Bank and are secured by commercial mortgage loans with underlying properties in Ireland and the UK. The bonds were not sold into the market but retained by the issuer. Overall issuance activity in the Jumbo ACS market came to a complete halt with the outbreak of the financial crisis and only recently resumed through the issuance of a new Mortgage ACS. Since WestLB Covered Bond Bank and Depfa ACS Bank are unlikely to resume benchmark issuance in a meaningful way, we expect future market activity to be fully relying on Mortgage ACS. High volumes of maturing government guaranteed debt in September 2010, could result in a significant increase in Mortgage ACS issuance.

Irish Asset Covered Securities – Rating Overview Issuer Public ACS Mortgage ACS Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch S&P Moody’s Fitch AIB n.a. n.a. n.a. AAA (S) Aaa (S) AAA (S) A (N) A1 (S) A- (S)

ANGIRI n.a. n.a. n.a. n.a. Aaa (S) AAA (S) BBB+ (N) A3 (N) A- (S)

BKIR n.a. n.a. n.a. AAA (S) Aaa (S) n.a. A (N) A1 (S) A- (S)

DEPFA AAA (N) Aa2 (N) AAA (S) n.a. n.a. n.a. BBB (P) A3 (N) A- (S)

WESTLB AAA (S) Aaa (S) n.a. n.a. n.a. n.a. BBB+ (N) A2 (N) n.a.

Source – S&P, Moody’s, Fitch (S) = stable, (P) = Positive, (N) = Negative, (D) = Developing


Total Outstanding Jumbo ACS Outstanding Jumbo ACS By Issuer (Sep 09)

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 Sep-09

Mortg. ACSPubl. ACS

EUR bn

0

2

4

6

8

10

12

14

16

DEPF

A

BKIR AIB

WES

TLB

Mortgage ACSPublic ACS

EUR bn


Jumbo ACS Gross Issuance Jumbo ACS Maturity Profile (Sep 09)

0

2

4

6

8

10

12

14

2003 2004 2005 2006 2007 2008 Sep-09

Mortg. ACSPubl. ACS

€bn

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014 2015 2016 2017

Mortg. ACSPubl. ACS

€bn



Italian Covered Bonds Legal basis The framework for the issuance of Italian Covered Bonds (Obbligazioni Garantite) is based on the Italian securitisation law (Law n. 130/1999), which was amended in May 2005 accordingly. The Ministry of Economy and Finance issued a set of secondary regulations in December 2006, which were followed by the implementing measures that were issued by the Bank of Italy in May 2007.

The issuers Any Italian bank that fulfils the minimum requirements set by the Bank of Italy can issue covered bonds. Banks need to have a minimum regulatory capital of €500mn and a total capital ratio of at least 9%. The bank would transfer eligible cover assets to an SPV which, in turn, guarantees the senior unsecured bond issued by the bank. The regulation by the Bank of Italy limits the amount of cover assets that can be transferred to the SPV, depending on the capitalisation of the transferring bank.

Transfer limits for eligible cover assets Regulatory Capital Level Transfer Limit

Total capital ratio ≥ 11% and Tier 1 ratio ≥ 7% No limit

Total capital ratio ≥ 10% and < 11% and Tier 1 ratio ≥ 6.5% 60% of all eligible assets

Total capital ratio ≥9% and < 10% and Tier 1 ratio ≥ 6% 25% of all eligible assets

Source - Ministry of Finance Cover assets Italian covered bonds can be secured by residential and commercial mortgage loans with a maximum LTV ratio of 80% and 60%, respectively. The geographical scope of mortgage collateral includes the EU and Switzerland. Public sector collateral can consist of debt issued or guaranteed by public sector authorities within the EU and Switzerland as long as their risk weighting is not higher than 20% under the revised standardised approach. Sovereign and sub-sovereign debt from outside the EU and Switzerland must have a risk weighting of at least 0% and 20%, respectively, under the revised standardised approach and must not account for more than 10% in the cover pool. ABS and MBS are also eligible as collateral if at least 95% of the underlying assets fulfil the eligibility criteria of Italian covered bonds. Substitute collateral is limited to a maximum of 15% in the cover pool and can consist of public sector debt, bank deposits and bonds of the issuing bank with a maximum residual maturity of one year. Hedging derivatives can also be included in the cover pool. An asset monitor appointed by the issuing bank oversees the quality of the cover pool as well as compliance with coverage requirements and transfer limits.


Matching requirements The nominal and net present value of the cover assets must at all times be at least as high as the nominal and net present value of the outstanding covered bonds. Interest payments arising from the cover pool have to be at least as high as interest payable on the outstanding covered bonds.

Post-bankruptcy procedures In the event of the issuing bank’s insolvency, the SPV would take over payments to covered bondholders according to the guarantee. Asset substitution would stop and the pool would become static. The covered bonds would not automatically accelerate. Should cash flows arising from the cover pool not be sufficient to repay all covered bonds, unsatisfied claims would rank pari passu with claims of unsecured creditors of the issuing bank.

Risk weighting Italian covered bonds meet the requirements of Article 22(4) of the UCITS directive as well as the CRD requirement and qualify for a preferential treatment under CRD.

Market development The first Jumbo covered bond under the new framework was issued in July 2008 by Banca Popolare di Milano (PMIIM). Two further issuers joined the market in 2009 with Unicredit (UCGIM) and UBI Banca (UBIIM). All issuers have so far used only Italian residential mortgage loans as collateral for their covered bonds. In all cases, the covered bonds have a soft bullet maturity with a possible extension of 12 months. We expect the number of issuers to grow in the coming 12 to 18 months by at least two or three banks.

Italian Covered Bonds – Rating Overview Issuer Portuguese Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch PMIIM n.a. Aaa (S) AAA (S) A- (N) A1 (S) A (N)

UBIIM n.a. Aaa (S) AAA (S) A (S) A1 (S) A+ (S)

UCGIM AAA (S) Aaa (S) AAA (S) A (S) Aa3 (S) A (N)


Outstanding Italian CB By Issuer (Sep 09) Jumbo Italian CB Maturity Profile (Sep 09)

0

1

2

3

UCGI

M

UBIIM

MILA

NO

EUR bn

0

1

2

3

4

2010 2011 2012 2013 2014 2015 2016

€bn



Luxembourgian Lettres de Gage Legal basis Luxembourgian Lettres de Gage (LDG) are issued on the basis of a law that was introduced in 1997 and subsequently amended in 2000. In October 2008, further changes to the LDG legislation were introduced, which aimed at increasing flexibility for issuers and protection for investors.

The issuers Issuers of LDG are subject to a special bank principle. By law, their business activities are mainly restricted to public sector lending, mortgage lending as well as the financing of certain movable assets. The funding of these activities is mainly conducted through issuance of covered bonds. Other activities, such as buying and selling securities in their own name are also permitted, but only insofar as they are auxiliary to their main business.

Cover assets LDG may be covered either by mortgage loans, public sector debt or loans backed by movable assets (e.g. ships, planes, trains). Covered bonds that meet the 22(4) UCITS criteria as well as senior tranches of ABS and MBS where at least 90% of the underlying assets fulfil the eligibility criteria for LDG, can be used as collateral as well. ABS/MBS tranches must have a minimum rating of AA-/Aa3. ABS/MBS where at least 50% of the underlying assets fulfil the eligibility criteria for LDG can be used as collateral if all ABS/MBS in the pool do not account for more than 20%.

The geographic range of eligible assets encompasses public sector debt and mortgages in the EU, the EEA and the OECD. Movable assets must be registered in a public register in the EU, EEA or OECD. Public sector debt is defined as debt from public authorities, which also includes debt from entities which are publicly owned but do not benefit from an explicit public sector guarantee. Residential and commercial mortgages must not have a LTV in excess of 80% and 60%, respectively. Substitute collateral, which can consist of cash, central bank debt and bank debt within the EU, the EEA and the OECD as well as covered bonds is limited to a maximum of 20%. Derivatives used for hedging purposes can also be included in the cover pool.

Mortgage assets, public sector assets and movable assets are kept in separate pools covering either Mortgage LDG, Public LDG or Movable LDG. For each pool, a special register has to be kept. An independent cover pool monitor (Reviseur Special) monitors the bank’s compliance with the coverage requirements. Any breach of coverage or matching requirements will be reported by the cover pool monitor to the banking supervisory authority.

Matching requirements With the amendment of 2008, a minimum over-collateralisation of 2% was introduced. The over-collateral has to be provided on a nominal as well as net present value basis. Interest income from the cover pool has to be at least as high as the interest payable on the outstanding LDG. The net present value of the cover pool has to be at least as high as the net present


value of the outstanding LDG. The limitation on outstanding LDG to 60 times the issuer’s capital was abolished in 2008.

Post-bankruptcy procedures In the event of the issuer’s bankruptcy, the cover pools and pertaining covered bonds are split from the issuer’s balance sheet and run on their own. The Luxembourg banking supervisor (Commission de Surveillance du Secteur Financier) will take over the administration of the split-off cover pools. Claims by covered bondholders who were not covered by the cash flows from the cover pool rank pari passu with unsecured creditors of the issuer.

Risk weighting Luxembourgian LDG meet the requirements of Article 22(4) of the UCITS directive. However, several features of the framework do not comply with the definitions of CRD. Preferential treatment under CRD thus depends on the composition of the respective cover pool.

Market development With five issuers in Luxembourg, the volume of total outstanding LDG reached €36.5bn at the end of 2008. Only a very small part of that consisted of Jumbo LDG. Traditionally, Luxembourgian covered bond issuers rely mainly on the private placement market. Going forward, we expect Jumbo issuance to resume, however not in a significant volume. The broadening of the asset base could lead to an increase of activity, but so far the vast majority of LDG is still secured by public sector debt.

Luxembourg Lettres de Gage – Rating Overview Issuer Public LDG Unsecured Debt


DEXGRP AAA (S) n.a. n.a. n.a. n.a. n.a.

EEPK AAA (S) n.a. n.a. n.a. n.a. n.a.

EURHYP AAA (S) n.a. AAA (S) A- (N) n.a. A (N)

NDB AAA (S) n.a. n.a. A- (N) n.a. n.a.

PBINTL AAA (N) n.a. n.a. BBB (P) n.a. n.a.



Norwegian Covered Bonds Legal basis The issuance of Norwegian Covered Bonds is based on the Norwegian Financial Services Act, which was accordingly amended (Articles 2-28 to 2-35) in March 2007. In addition, a set of side regulations was published by the Ministry of Finance during the same year.

The issuers Issuers of Norwegian Covered Bonds are subject to the special bank principle, i.e., their business activity is limited to mainly originating and holding mortgage loans and public sector debt, as well as the issuance of covered bonds. The issuers are under the special supervision of the Norwegian Financial Supervisory Authority (Kredittilsynet). Banks must notify Kredittilsynet at least 30 days before the first issuance of covered bonds.

Cover assets The cover pool for Norwegian Covered Bonds may consist of residential and commercial mortgage loans. Residential and commercial mortgage loans must not have a LTV ratio in excess of 75% and 60%, respectively. The underlying property which secures the mortgage loan must be located within the EEA or the OECD area. The country where the underlying loan is located needs to be rated at least AA- (credit quality step 1). Public sector debt is also eligible as collateral. There are no separated pools for mortgage and public sector assets. Geographically, public sector debt is limited to the EEA and the OECD area. Public sector assets from outside the EEA need to have a minimum rating of AA- (credit quality step 1). If the rating of these assets is below AA- but at least A- (credit quality step 2), the amount of these assets in the cover pool is limited to 20%. Substitute collateral, which has to be of a secure and liquid nature, is limited to a maximum 20% within the cover pool. The limit can be increased to 30% for a limited period with the permission of Kredittilsynet. Derivatives used for hedging purposes can also be included in the cover pool.

For each issuing institute, an independent cover pool inspector will be appointed by Kredittilsynet. The inspector monitors the maintenance of the cover register and regularly reviews compliance with the coverage requirements. The inspector reports directly to Kredittilsynet.

Matching requirements The value of the cover pool has to exceed the value of the outstanding covered bonds at all times. However, the legal framework does not require a specific level of over-collateralisation. Interest income on the cover pool shall at all times exceed interest payable on the outstanding covered bonds. Issuers have to establish limit systems in order to control and limit interest rate, liquidity and foreign exchange risk. So far, all issuers have chosen to issue covered bonds with a soft bullet maturity with a 12 month extension period.


Post-bankruptcy procedures In the event of the issuer’s insolvency a bankruptcy administrator will be appointed. Together with a creditors’ committee the administrator shall ensure that the covered bondholders continue to receive timely payments from the cover assets. The covered bonds do not automatically accelerate in the event of the issuer’s bankruptcy. The administrator and the creditors’ committee are entitled to sell assets or even issue new covered bonds in order to ensure timely payments to the covered bondholders. If the cover pool is not sufficient to cover all preferential claims, the administrator will declare default of the pool. Claims of covered bondholders that have not been satisfied rank pari passu with claims of unsecured creditors of the issuer.

Risk weighting Norwegian Covered Bonds meet the requirements of Article 22(4) of the UCITS directive as well as the CRD requirement and qualify for preferential treatment under CRD.

Market development The size of the Norwegian Jumbo covered bond market has reached a total volume of €10.5bn, with DNBNOR being the largest issuer. Issuance activity came to a halt in September 2008 and had not resumed as of the date of this publication. Since autumn 2008, Norwegian banks can use a special facility with the Norwegian central bank in order to swap their own covered bonds (as well as MBS) into new government bonds. The swap agreements can have a maturity of up to three years. As the covered bond market further recovers, we expect Norwegian issuers to return to the Euro Jumbo market. However, the usage of the special swap facility could limit the immediate issuance potential and thus should prevent any “catch-up” issuance.

Norwegian Covered Bonds – Rating Overview Issuer Norwegian Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch DNBNOR AAA (S) Aaa (S) AAA (S) AA- (N) Aa1 (N) A+ (S)

SPABOL AAA (S) Aaa (S) AAA (S) n.a. n.a. n.a.


Outstanding Norwegian CB By Issuer (Sep 09) Jumbo Norwegian CB Maturity Profile (Sep 09)

0

1

2

3

4

5

6

7

8

DNBN

OR

SPAB

OL

EUR bn

0

0.5

1

1.5

2

2.5

3

3.5

2010 2011 2012 2013

€bn



Portuguese Covered Bonds Legal basis Portuguese Covered Bonds (PTCB) are issued on the basis of the Decree-Law 59/2006, which was passed in March 2006. The law is supplemented by a set of side regulations (Aviso) which were issued by the Bank of Portugal in October 2006.

The issuers PTCB can be issued by any Portuguese bank which is legally authorised to grant mortgage credits and which has a minimum capitalisation of €7.5mn. Although there is no compulsory special bank principle in Portugal, the framework provides the possibility to issue PTCB also via specialised institutions, so-called mortgage credit institutions. The allowed business activities of mortgage credit institutions are defined within the covered bond law. So far, PTCB have not been issued via specialised mortgage credit institutions.

Cover assets The collateral for PTCB can consist of mortgage loans or public sector debt. Both collateral types have to be kept in separate registers. Consequently, there are two types of PTCB, Public Sector PTCB and Mortgage PTCB. An independent auditor verifies the compliance of the issuer with the coverage requirements set out in the framework.

Loans secured by a first rank mortgage on residential or commercial property within the EU qualify as collateral. In addition, housing loans, which are guaranteed by a credit institution or through an adequate insurance contract also qualify as mortgage collateral. Residential mortgages count as collateral up to an LTV of 80%, while commercial mortgages count up to 60%. Valuation of the underlying properties must be carried out by an independent specialist before the mortgage loan is entered into the cover pool. The issuer has to verify the valuation every three years in the case of residential mortgages and annually for commercial mortgages. In the event of significant market changes, a revaluation has to be carried out more frequently. Revaluation can be linked to a mortgage index.

Public sector collateral can consist of loans and bonds issued or guaranteed by central administrations or regional and local authorities within the EU.

Substitution assets are limited to a maximum of 20% of the total cover pool. These assets can consist of deposits with the Bank of Portugal, cash or long-term deposits with credit institutions rated at least A- or other high quality liquid assets as defined by the Bank of Portugal. Derivatives used for hedging purposes can also be part of the cover pool. Claims of derivative counterparts rank pari passu with those of covered bondholders.

Matching requirements The Portuguese covered bond framework requires that the nominal value of outstanding mortgage PTCB does not exceed 95% of the nominal value of the cover assets, resulting in a mandatory over-collateralisation of 5.3%. There is no over-collateralisation required for public sector PTCB. The average maturity of outstanding covered bonds cannot exceed that of the cover assets, and interest payable on outstanding covered bonds must not


exceed interest received from the cover assets. Furthermore, the issuer is obliged to hedge potential currency risk. Issuers are also required to provide an NPV matching which has to withstand at stress scenario (200bp yield curve shift).

Post-bankruptcy procedures In the event of the issuer’s insolvency, cover assets and outstanding covered bonds are segregated from the balance sheet. The Bank of Portugal has the power to appoint another credit institution which will take over the management of the separated cover pool and outstanding covered bonds. Although the covered bonds do not automatically accelerate in the event of the issuer’s bankruptcy, there is the possibility of a bondholder meeting to decide (with a two third’s majority) on the early redemption of the outstanding covered bonds in a post-bankruptcy scenario.

Risk weighting PTCB meet the requirements of Article 22(4) of the UCITS directive. In addition, PTCB meet the requirements of the CRD provided that non-guaranteed bank debt does not exceed 15% of the cover pool. As a result, PTCB qualify for a preferential risk weighting under CRD.

Market development Within three years, the number of covered bond issuers has grown to six, while the volume of outstanding Jumbo covered bonds amounts to €15bn. The largest part of these covered bonds is covered by Portuguese residential mortgages. However, in 2009 the first public sector covered bond was issued in Portugal. We expect market growth to remain moderate with the main activity taking place in the mortgage covered bond segment.

Portuguese Covered Bonds – Rating Overview Issuer Public Covered Bonds Mortgage Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch S&P Moody’s Fitch BCPPL n.a. n.a. n.a. n.a. Aaa (S) AAA (S) A- (S) A1 (N) A+ (S)

BESPL n.a. n.a. n.a. AAA (S) Aaa (S) AAA (S) A (N) A1 (S) A+ (S)

BPIPL n.a. n.a. n.a. AAA (S) Aaa (S) AAA (S) A (N) A1 (N) A+ (N)

CXGD AAA (S) Aaa (S) AAA (S) AAA (S) Aaa (S) AAA (S) A+ (N) Aa2 (N) AA- (N)

MONTPI n.a. n.a. n.a. n.a. Aa1 (S) AAA (S) n.a. Baa1 (N) A- (S)

SANTAN n.a. n.a. n.a. AAA (S) Aaa (S) AAA (S) AA- (S) Aa3 (N) AA (S)

Source – S&P, Moody’s, Fitch (S) = stable, (P) = Positive, (N) = Negative, (D) = Developing

Outstanding Portuguese CB By Issuer (Sep 09) Jumbo Portuguese CB Maturity Profile (Sep 09)

0

1

2

3

4

5

6

CXGD

BCPN

BESN

N

BPIP

L

SANT

AN

MONT

PI

EUR bn

0.00.51.01.52.02.53.03.54.04.5

2010 2011 2012 2013 2014 2015 2016 2017

Mortg. CBPubl. CB

€bn



Spanish Cédulas Legal basis The issuance of Spanish Cédulas Hipotecarias (CH) is based on the Spanish Mortgage Market Law of 1981. The law for the issuance of Spanish public covered bonds (Cédulas Territoreales, CT) was passed in 2002. In 2007 the Spanish Mortgage Market Law of 1981 was amended, adding a number of improvements and clarifications to the existing framework for the issuance of CH. The changes included an increase of the legal minimum over collateralisation to 25%, the introduction of substitute collateral as well as inclusion of derivatives as collateral.

The issuers Every Spanish bank can issue Cédulas, i.e., there is no special bank principle. Main issuers are large Spanish commercial banks as well as savings banks of various sizes. As a specialty of the Cédulas market, there are also issuers of joint or pooled Cédulas, such as AYTCED, CEDTDA, IMCEDI or PITCH. Within these structures, a number of banks issue smaller-sized Cédulas with the same coupon and payment details into a special fund. The fund then issues one large bond, which is backed by the portfolio of Cédulas. Cash flows from the underlying Cédulas are simply passed on to the holders of the joint Cédulas issue. The structure is enhanced by liquidity support (either cash buffer or liquidity line), and also provides for a potential maturity extension of up to three years (soft bullet).

Cover assets CH can be covered by residential and commercial mortgages within the EU with a maximum LTV of 80% (95% in the case of an additional guarantee or insurance) and 60%, respectively. CT are covered by loans to public sector entities within the EEA. The cover register has no “earmarking-function”. Instead, all mortgages and public sector debt (eligible and non-eligible) on the issuer’s balance sheet are automatically earmarked as collateral for any outstanding Cédulas. Thus, Cédulas holders have a preferential claim against all mortgage or public sector assets on the balance sheet of the issuer, i.e., also on those which do not meet the coverage criteria. Derivatives used as hedge contracts can be included in the cover pool, so derivative counterparts also have a preferential claim against the cover assets. Substitute collateral is limited to a maximum of 5%.

Matching requirements CH and CT have a mandatory minimum over-collateralisation of 25% and 42%, respectively. The calculation of the minimum over-collateralisation is based only on eligible assets. There are no further covered bond specific matching requirements.

Post-bankruptcy procedures In the event of the issuer’s bankruptcy, Cédulas cash flows arising from the collateral assets would be used to make payments to Cédulas holders as originally scheduled. There is no automatic acceleration of payments. The preferential claim of Cédulas holders ranks very high, and comes even ahead of tax claims or loan payments to employers of the bank. The


bankruptcy administrators have the possibility to liquidate assets or to borrow against the pool in order to create liquidity. There is no specifically appointed cover pool administrator for the Cédulas. Instead, the bankruptcy administrators that look after claims of unsecured creditors are also in charge of claims from Cédulas holders. Unsettled claims from covered bondholders rank pari passu with the other unsecured creditors.

If an issuer that is part of a joint Cédulas transaction falls into bankruptcy, interest payments continue to be paid to the joint Cédulas holders out of the liquidity buffer. The liquidity buffer compensates for potential time delays that might occur during the liquidation of the underlying collateral portfolio. If interest payments under the Cédulas of the defaulted issuer are resumed, the liquidity buffer is replenished. Potential losses occurring from a shortfall of collateral of one of the participating banks are borne by the holders of the joint Cédulas on a pro-rata basis.

Risk weighting Spanish Cédulas meet the requirements of Article 22(4) of the UCITS directive, as well as the CRD requirements, and qualify for preferential treatment under CRD.

Market development Issuance activity resumed within the second quarter of 2009, after a six month break following the collapse of Lehman. However, issuance volumes still remain below pre-crisis levels and are likely to exceed the volume of maturing Cédulas only by a small margin. In the coming years, volumes of maturing Cédulas will increase, but there could be also increasing pressure to substitute central bank funding and government guaranteed funding with new Cédulas issuance. As a result, we do not expect the Cédulas market to shrink significantly within the next few years. The number of new issuers joining the Jumbo market has grown further in the last 18 months. Possible consolidation within the Spanish banking sector could lead over time to a smaller number of Cédulas issuers. However, as these consolidations are more likely to occur in the segment of smaller sized savings banks, this should mainly affect the composition of joint or pooled Cédulas and less issuers of direct benchmark transactions.


Spanish Cédulas – Rating Overview

Issuer Cédulas Territoreales Cédulas Hipotecarias Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch S&P Moody’s FitchAYTCED AAA (S) Aaa (N) AAA (S) AAA (S) Aaa (N) AAA (S) n.a. n.a. n.a. BANEST n.a. n.a. n.a. n.a. Aaa (S) AAA (S) AA (N) Aa3 (N) AA (S) BANSAB n.a. n.a. n.a. n.a. Aaa (S) n.a. A (S) A2 (N) A+ (N) BBVASM n.a. Aaa (S) n.a. n.a. Aaa (S) n.a. AA (N) Aa2 (N) AA- (P) BILBIZ n.a. n.a. n.a. n.a. Aaa (S) n.a. n.a. A1 (N) A+ (S) BKTSM n.a. n.a. n.a. n.a. Aaa (S) AAA (S) A- (S) A2 (N) A+ (S) POPSM n.a. n.a. n.a. AA+ (S) Aaa (S) AAA A (N) Aa3 (N) AA- (N) CAGALI n.a. Aaa (S) n.a. n.a. Aaa (N) n.a. n.a. A3 (N) BBB+ (S) CAIXAB n.a. Aaa (S) n.a. AAA (S) Aaa (S) n.a. AA- (N) Aa2 (N) AA- (N) CAIXAC n.a. Aaa (S) n.a. n.a. Aaa (N) withdrawn n.a. A3 (N) withdrawn CAJAME n.a. n.a. n.a. n.a. Aaa (N) n.a. withdrawn A3 (N) A- (N) CAJAMM n.a. Aaa (S) n.a. AA (S) Aaa (S) n.a. A (N) A1 (N) A+ (N) CAVALE n.a. n.a. n.a. n.a. Aaa (N) n.a. n.a. A3 (N) BBB+ (S) CEDTDA n.a. Aaa (N) n.a. AAA (S) Aaa (N) AAA (S) n.a. n.a. n.a. IMCEDI n.a. n.a. n.a. AAA (S) Aaa (S) AAA (S) n.a. n.a. n.a. PASTOR n.a. n.a. n.a. n.a. Aaa (N) n.a. withdrawn A3 (N) n.a. PITCH n.a. n.a. n.a. AAA (S) Aaa (S) AAA (S) n.a. n.a. n.a. SANTAN n.a. Aaa (S) n.a. AAA (S) Aaa (S) AAA (S) AA (N) Aa2 (N) AA (S) SANTCF n.a. n.a. n.a. n.a. Aaa (S) n.a. AA (N) A2 (N) AA (S)


Total Outstanding Jumbo Cédulas Outstanding Jumbo Cédulas By Issuer (Sep 09)

0

50

100

150

200

250

300

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-09

CTCH

0

5

10

15

20

25

30

35

40

45

50

AYTC

ED

BBVS

M

CAIX

AB

SANT

AN

CAJA

MM

CEDT

DA

BANE

ST

IMCE

DI

BANS

AB

POPS

M

CEDG

BP

CAIX

AC

PAST

OR

BANC

LE

CAGA

LI

BKTS

M

CTCH

EUR bn


Jumbo Cédulas Gross Issuance Jumbo Cédulas Maturity Profile (Sep 09)

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-09

CTCH

€bn

0

5

10

15

20

25

30

35

2010

2012

2014

2016

2018

2020

2022

2024

2026

2031

CTCH

€bn



Swedish Säkerställda Obligationer Legal basis The law for the issuance of Swedish Covered Bonds (Säkerställda Obligationer) came into effect on 1 July 2004 and was supplemented by an additional regulation from the supervisory authority (Finansinspektionen, the Swedish FSA) in September of the same year.

The issuers Swedish Covered Bonds (SCB) can be issued by every Swedish bank, provided it has received a special licence from the FSA. Thus, there is no special bank principle in Sweden. Bonds, which have been issued previously to fund mortgage and public sector assets, have to be converted into SBC before the bank can start issuing new SCB. Issuers are under the specific supervision of the Swedish FSA (SFSA). If the issuer is in material breach of any of its obligations under the covered bond act, the SFSA can revoke the license to issue covered bonds. The license can also be revoked if the issuer has not issued any covered bonds within one year from the date that is has received the license.

Cover assets SCB can be covered by mortgage loans and public sector debt. Both types of assets are held within the same pool. Consequently, there is no distinction between Public SCB and Mortgage SCB. All cover assets have to be entered into a special register. The register also contains derivative agreements, which have been used for hedging purposes.

Mortgage loans secured on residential, agricultural as well as office and commercial property can be used as collateral. In addition, site-leasehold rights designated for residential, office or business purposes and tenant-owner rights can be used as collateral. The share of commercial mortgages within the cover pool is limited to a maximum of 10%. The geographical scope of eligible mortgage assets is limited to the European Economic Area (EEA). Eligible residential mortgages must not have a loan-to-value (LTV) ratio in excess of 75%. The maximum LTV level for agricultural and commercial mortgages is 70% and 60%, respectively. The valuation of the underlying property is linked to the market value and has to be carried out by an experienced appraiser. Banks have to review the valuation “where the market conditions at the locality or the region have seriously declined”.

Public sector collateral consists of loans from or guaranteed by the following entities:

The Swedish State, a Swedish municipality or a comparable public body; A foreign state or central bank where the claim is in the foreign state’s

currency and is refinanced in that currency; The European Communities or any of the foreign states or central banks

as prescribed by the Swedish Government; Foreign municipalities or public bodies comparable therewith which

possesses the authority to collect taxes as prescribed by the Swedish Government.


A maximum of 20% of the cover pool can consist of substitute collateral. In special circumstances, the FSA can permit a maximum of 30% for a limited period of time. Substitute collateral can consist of 0% risk-weighted assets such as cash as well as bonds issued by the Swedish government, Swedish municipalities or a comparable public body. The FSA might also permit the use of other assets such as obligations from certain financial institutions with a risk weighting of 20% as substitute collateral.

The FSA appoints and remunerates an independent inspector for each issuing institution. This person’s main task is to monitor that the cover register is maintained according to the provisions of the covered bond act, in particular that only assets which meet the eligibility criteria are entered into the register.

Matching requirements At all times, the nominal value of the cover pool must be higher than the nominal value of the claims arising from the outstanding covered bonds. In addition, the Swedish framework prescribes that the present value of the cover assets exceeds the present value of the liabilities with respect to the covered bonds. The present value matching has to withstand a simulated parallel shift of the yield curve (upwards and downwards) by 100bp. Currency risk, which can occur because of mismatches between cover assets and outstanding covered bonds, is limited by the fact that present value matching has to withstand a simulated 10% change of the ratio between the currency of the covered bonds and the currency of the cover assets.

Post-bankruptcy proceedings Upon the issuer’s insolvency, all assets contained in the cover pool, together with the derivative agreements listed in the cover register, are segregated from the bank’s balance sheet. Covered bondholders and derivative counterparts continue to receive interest and capital payments as scheduled. Within the Swedish framework there is no special administrator appointed for the management of the segregated cover pool. Instead, the pool will be administered by the same bankruptcy administrator that is responsible for the liquidation of the non-collateral assets. Under Swedish bankruptcy law, the administrator is not allowed to engage in any bridge financing in order to close potential liquidity gaps arising in a post-bankruptcy scenario. There is, however, the possibility that the administrator sells assets from the cover pool in order to generate liquidity for the payment of covered bondholders. In the first half of 2009 discussions started about amending the Swedish regulatory framework in order to allow the bankruptcy administrator to raise liquidity more easily.

Risk weighting SCB meet the requirements of Article 22(4) of the UCITS directive. In addition, SCB meet the requirements of the CRD provided that non-guaranteed bank debt does not exceed 15% of the cover pool and thus qualify for a preferential risk weighting under CRD.


Market development So far, five out of seven issuers in Sweden have accessed the Euro Jumbo market. Issuance activity is mainly focussed on maturities ranging between 3 and 5 years. In addition the Jumbo market, there is a well developed domestic Swedish covered bond market. During the financial crisis, Swedish issuers mainly relied on funding through the domestic market, leading to a significant decline in Jumbo activity. As spread differentiation decreases in the Jumbo market, Swedish Jumbo issuance is likely to pick up again.

Swedish Covered Bonds – Rating Overview Issuer Swedish Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch NBHSS AAA (S) Aaa (S) n.a. AA- (S) Aa2 (S) AA- (S)

SCBCC AAA (S) Aaa (S) n.a. A+ (N) A1 (N) n.a.

SEB n.a. Aaa (S) n.a. A (N) A1 (N) A+ (S)

SPNTAB AAA (S) Aaa (S) n.a. A (N) A2 (N) A+ (S)

SVSKHB n.a. Aaa (S) n.a. AA- (S) n.a. AA- (S)


Outstanding Swedish CB By Issuer (Sep 09) Jumbo Swedish CB Maturity Profile (Sep 09)

0

1

2

3

4

5

6

NBHS

S

SVSK

HB SEB

SCBC

C

SPNT

AB

EUR bn

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014

€bn



UK Covered Bonds Legal basis On 6 March 2008, the “Regulated Covered Bond Regulations 2008” came into effect. The regulations are complemented by the “Regulated Covered Bonds Specialist Sourcebook” from the FSA. Before the implementation of the legal framework UK Covered Bond were solely issued on the basis of contractual agreements. The main aim of the framework is to allow the issuance of “Regulated Covered Bonds”, which meet the requirements of Art. 22(4) UCITS. So far, eight issuers (ABBEY, ALLNCE, BACR, BOS, HSBC, LEED, NWIDE, YBS) have registered their programmes with the FSA. A list of registered covered bond programmes can be found on the FSA’s website. Since the framework follows a principles-based approach and contains only few detailed rules, the specific terms of the covered bonds continue to be covered by contract within the covered bond programmes. The method of asset segregation remains the same under the framework. The originator of the mortgages sells a pool of mortgages to an entity which is incorporated as a limited liability partnership (LLP). The LLP is consolidated within the issuer, but does not fall in the bankruptcy estate in the event of the issuer’s insolvency. The LLP issues a guarantee in favour of the holders of a senior unsecured bond (the covered bond) issued by the originating bank. Thus, holders of a UK covered bond also have an unsecured claim against the issuing bank. The transfer of mortgages to the LLP is conducted on the basis of an equitable assignment. This means that the LLP is the economic owner of the mortgages, but the transfer will only be completed on the occurrence of certain trigger events. Such trigger events include the default of the issuer and a continuous breach of the Asset Coverage Test (ACT).

The issuers The FSA maintains a register for regulated covered bond issuers and regulated covered bonds. Issuers have to apply to the FSA to include their covered bond programmes in the register. Once the programme has been registered, the issuer can draw under the programme without the need of further applications. Material changes to the registered covered bond programmes need the approval of the FSA. Issuers of UK Covered Bonds do not need to be specialised institutions.

Cover assets According to the regulations, the cover pool of UK Covered Bonds can consist of mortgages, public sector debt, senior AAA-rated MBS tranches, ship mortgage loans and social housing loans. Maximum LTV ratios for residential and commercial mortgages are limited at 80% and 60%, respectively. LTV ratios of ship mortgage loans are limited to 60%. Geographically, eligible mortgages are limited to EEA countries, Switzerland, USA, Canada, Japan, Australia and New Zealand. The geographical range of public sector debt includes all EU countries and those non-EU countries which are rated AA- or better. Substitution assets are limited to a maximum of 15%.


Existing UKCB programmes limit the LTV ratio within the calculation of the ACT to a range of 60% to 75%. So far, only UK residential mortgage loans, UK commercial mortgage loans or social housing loans have been used by existing programmes. UK covered bonds issued in Euro Jumbo format are so far secured exclusively by UK residential mortgage loans.

Matching requirements The covered bond framework requires that the cover pool is capable of securing claims related to the covered bonds as well as cost required for the maintenance and administration of the cover pool in the event of the issuer’s default. There are no “specific” matching requirements; however, the FSA will consider credit risk, asset concentration risk, market risk and counterparty risk when assessing the issuer’s compliance with the general coverage requirement.

In existing covered bond programmes, interest and currency risk between the mortgage loans and the outstanding covered bonds is hedged through several swap agreements that the LLP engages in. The swap counterparties are subject to certain minimum ratings. If the rating of the swap counterparty falls below a certain level, payment obligations under the swap need to be collateralised or a new, sufficiently rated swap counterparty needs to be found.

Existing UK covered bond programmes show different repayment structures. While HBOS and HSBC use hard bullet repayment in conjunction with a pre-maturity test, the other issuers have a soft bullet repayment. A soft bullet repayment means that the legal maturity of the covered bonds can be extended by one year if the issuer fails to repay the covered bonds at maturity due to insufficient liquidity within the LLP. The maturity extension allows the LLP to generate liquidity, e.g., through liquidating mortgages, without causing a default of the covered bonds. During the extension period, the covered bonds continue to bear interest; however, the fixed coupon is typically replaced with a floating coupon. During 2009, several issuers have chosen to modify the repayment structures in order to avoid downgrades of their covered bond programmes. According to the changed programme structures, the covered bonds can turn into pass-through bonds if the issuer fails to redeem the bonds on their expected maturity date. As a result, asset sales in a post-bankruptcy scenario are no longer necessary in order to repay maturing covered bonds. However, the final repayment of outstanding covered bonds can take significantly longer.

Hard bullet structures demand full repayment at the specified maturity in order to avoid a default of the covered bonds. The hard bullet repayment is used in conjunction with a pre-maturity test. The pre-maturity test ensures that there is enough liquidity to repay the covered bonds at maturity should the issuer fail to do so. A liquidity buffer has to be set up covering the amount to be paid on the next maturing covered bonds in case the issuer’s rating falls below a certain level within six months (twelve in case a lower rating level is reached) of a hard bullet covered bond maturing. The liquidity buffer, which will be held within a GIC account, can be filled either by selling mortgages held by the LLP or by cash injections from the issuer.


Post-bankruptcy procedures Following an issuer event of default, the equitable assignment of mortgages to the LLP will be completed and the LLP will take over payments of capital and interest to the covered bondholders. In such a scenario there would be no further ACT, thus no substitution of assets. Cash flows arising from the pool would be passed on to the covered bondholders as originally scheduled, as long as the pool is solvent. Solvency of the pool is determined by a monthly Amortisation Test (AT). The principle of the AT is similar to that of the ACT, but with a less strict valuation basis. For example, there is no longer a hair cut or deduction of mortgage loans in arrears and LTV limits are raised to 100%. If the AT is breached, the assets held by the LLP will be liquidated and the covered bonds accelerated. Unpaid claims of covered bondholders rank pari passu with other unsecured creditors.

The framework generally accepts the post-bankruptcy procedures laid out in the existing programmes. However, Regulated Covered Bonds show a different priority of payment in a post-bankruptcy scenario than that prescribed in existing programmes. In unregulated programmes, swap counterparties, paying agents and other service providers rank ahead of covered bondholders in a post-bankruptcy scenario. For Regulated Covered Bonds, these counterparties have to rank pari passu with the covered bondholders.

Risk weighting Regulated Covered Bonds meet the requirements of Article 22(4) of the UCITS directive and qualify for preferential treatment under CRD.

Market development Despite the introduction of a regulated covered bond framework, primary issuance did not resume, leaving the market closed since the autumn of 2007. Instead, several banks issued and retained covered bonds during 2008 in order to use them to access the Special Liquidity Scheme (SLS) of the Bank of England. In total, close to €80bn in UK covered bonds were issued and used for the SLS. The increasing encumbrance of assets has caused the FSA to revise its policy regarding issuance limits of covered bonds. In October 2008, the soft issuance limit of 20% was replaced with an individual issuer by issuer assessment. According to the new policy, any new issuance of covered bonds or significant new asset encumbrance has to be “discussed” with the FSA prior to its occurrence. While this rule is significantly stricter than the previous policy (or even the initial 4% limit), we still expect issuance of UK covered bonds to re-emerge as market recovery progresses. In the longer run, covered bond issuance could further grow from the need to replace maturing bonds and SLS funding which matures in 2012.

Bradford & Bingley (BRADBI) and Northern Rock (NRKLN) are currently in public ownership. BRADBI is already in an orderly run off as it is no longer originating any new mortgage business. Subject to approval from the EU commission, NRKLN will be split into a BankCo and an AssetCo, the latter of which will also be in an orderly run off. Outstanding covered bonds of NRKLN will be part of the AssetCo. While outstanding covered bonds (or claims potentially not covered by the cover pool) are expected to benefit from a government guarantee, we do not expect these two issuers to launch


any new covered bond going forward. Neither BRADBI nor NRKLN have their covered bond programmes currently registered with the FSA.

UK Covered Bonds – Rating Overview Issuer UK Covered Bonds Unsecured Debt

S&P Moody’s Fitch S&P Moody’s Fitch ABBEY AAA (S) Aaa (S) AAA (S) AA (S) Aa3 (N) AA- (S)

BOS AAA (S) Aaa (S) AAA (S) A+ (S) Aa3 (S) AA- (S)

BRADBI AAA (S) Aaa (S) AAA (S) n.a. A2 (P) AAA (S)

HSBC AAA (S) Aaa (S) AAA (S) AA (N) Aa2 (N) AA (N)

NRKLN AAA (S) Aaa (N) AAA (S) A (N) A2 (D) A- (D)

NWIDE AAA (S) Aaa (S) AAA (S) A+ (N) Aa3 (S) AA- (S)

YBS AAA (S) Aa1 (S) AAA (S) A- (S) Baa1 (N) A- (S)


Total Outstanding Jumbo UKCB Outstanding Jumbo UKCB By Issuer (Sep 09)

0

10

20

30

40

50

60

70

2003 2004 2005 2006 2007 2008 Sep-09

EUR bn

0

5

10

15

20

25

HBOS

NRKL

N

NWID

E

BRAD

BI

ABBE

Y

YBS

HSBC

EUR bn


Jumbo UKCB Gross Issuance Jumbo UKCB Maturity Profile (Sep 09)

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 Sep-09

€bn

0123456789

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

€bn



US Covered Bonds Legal basis So far, US Covered Bonds have only been issued based on contractual agreements. Two banks (Bank of America (BAC) and Washington Mutual (now JPM)) have set up covered bond programmes. In July 2008, the Federal Deposit Insurance Corporation (FDIC) issued a policy statement on the treatment of US Covered Bonds in the event of insolvency of the sponsor bank. The policy statement was supplemented by “Best Practices for Residential Covered Bonds” which were released by the US Treasury later that month. The best practices set out a number of requirements that the covered bond programmes must conform with throughout their entire life and not just at the time of issuance. Both issuers of outstanding US covered bonds have committed themselves to align their programmes with the new guidelines; however the actual change has not happened yet. Since the publication of the policy statement and the best practices no US covered bond has been issued yet.

The issuers So far, US Covered Bonds have not been issued directly by the bank that originates the mortgage loans, but by a special purpose vehicle (WM Covered Bond Programme in the case of JPM and “BA Covered Bond Issuer” in the case of BAC). In both cases, the issuer is a statutory trust organised under the laws of Delaware, and thus not a regulated financial institution. It is not owned by the originating bank and there is no direct or indirect support from the bank. The issuer’s activities consist of the acquisition of Mortgage Bonds from the bank and the issuance of covered bonds. For each covered bond that is issued, the bank issues a mortgage bond and sells it to the special purpose vehicle. These mortgage bonds will be denominated in USD, and will carry a floating rate coupon. After being swapped into fixed rate EUR cash flows, the cash flows arising from the mortgage bond will be passed on to the covered bondholders. The recourse of the covered bondholders is limited to the cash flows arising from the mortgage bonds which, in turn, represent full recourse against bank.

According to the best practices, issuance of covered bonds can also be made by the originating bank directly, with a designated cover pool within the issuer’s balance sheet.

Cover assets The mortgage bonds are secured by a dynamic pool of mortgage loans held by the originating bank. A monthly Asset Coverage Test (“ACT”) ensures that there is always sufficient mortgage collateral for the outstanding mortgage bonds. Within the ACT, mortgage loans only count as collateral up to a LTV ratio of 75%. The ACT also provides for a dynamic minimum over-collateralisation. Valuation of the mortgages is linked to the OFHEO House Price Index. If the ACT is breached and not passed on the next test date, this would trigger a mortgage bond issuer event of default. As a result, no further covered bonds could be issued under the programme and the covered bond issuer would be entitled to enforce its secured claims under the mortgage bonds.


The covered bond programme specifies certain eligibility criteria for the mortgages that can be used. These eligibility criteria are relatively broad, with the main restriction being that the inclusion of the mortgage loans should not lead to a mortgage bond default or a negative rating effect for the covered bonds. Mortgage loans used as collateral must not have an outstanding volume greater than $3mn (JPM) or $5mn (BAC). Eligibility criteria can only be changed with the approval of the rating agencies.

In addition to mortgage loans, a maximum of 10% of the collateral can consist of substitution assets. These assets include exposures to 0% risk-weighted public sector entities and central banks, as well as exposures to 10% risk-weighted institutions. Exposures to 20% risk-weighted institutions and AAA-rated RMBS tranches can also be used, but only if their share does not exceed 10% of the outstanding covered bonds.

The best practices (and to some extend the FDIC policy statement) also contain a set of eligibility criteria for US covered bonds. The two existing programmes do not currently comply with all of the requirements and would need to be adjusted accordingly to make them compliant. Eligible collateral for covered bonds must be performing first lien mortgages on one-to-four family residential properties. The mortgages shall be underwritten at the fully-indexed rate (i.e. taking into consideration future interest changes) and on the basis of documented income. Mortgages which are in arrears for more than 60 days have to be replaced with performing loans. Mortgages must have a maximum LTV ratio of 80% at the time of inclusion in the cover pool. The LTV will be updated on a quarterly basis using a house price index. A single Metro Statistical Area cannot make up more than 20% of the cover pool. Negative amortisation mortgages are not eligible.

Matching requirements Interest rate and currency mismatches between the USD-denominated, floating-rate mortgage bonds and the EUR-denominated fixed-rate covered bonds are hedged via a covered bond swap. Potential interest rate and prepayment risk between the mortgage loans and the mortgage bonds is borne by the bank.

The best practices require a minimum over-collateralisation of 5%. Hedging of currency risks is mandatory. Covered bonds may not account for more than 4% of an issuer’s liabilities after issuance.

Post-bankruptcy procedures In the event of the bank’s default, the covered bond issuer is entitled to enforce the security granted under the mortgage bonds. The proceeds arising from the realisation of the mortgage collateral would be deposited in a GIC account. Interest payments arising from the GIC account will then be passed on to the covered bond swap provider which continues to make fixed-rate EUR payments to the covered bond issuer. The covered bonds do not automatically accelerate. Both covered bond programmes provide for a soft bullet repayment, i.e., there is an optional maturity extension of 60 days (first two issues of JPM) or 120 days (all other issues of JPM and BAC) in the event of insufficient liquidity to repay the covered bonds.


In the event of the bank’s insolvency, the Federal Deposit Insurance Corporation (FDIC) has the power to repudiate contracts the bank has entered into. If this affects the mortgage bonds, compensatory damages would be paid to the covered bond issuer for the benefit of the covered bondholders. These damages would reflect the par value of the mortgage bonds, plus accrued interest. In addition, the FDIC has the power to order a stay period of up to 90 days during which creditors would not have access to the collateral or receive any damages. During this period, the covered bond swap provider would still have to make interest payments to the covered bond issuer even if he does not receive any payments from the bank or the GIC account. This stay period was shortened to 10 days for covered bonds that meet the requirements of the FDIC policy statement.

Risk weighting Based on the risk weighting of the underlying mortgage bonds, US Covered Bonds have a 20% risk weighting (“look-through” approach). They do not meet the requirements of Article 22(4) of the UCITS directive. Consequently, they do not qualify for preferential treatment under CRD either.

Market development In September of 2008 Washington Mutual collapsed and its bank subsidiary was taken over by JP Morgan. With this, JP Morgan became the sponsor bank of WM Covered Bonds. While the FDIC policy statement and the Treasury’s best practices have been designed to lay a foundation for the establishment of a US covered bond market, no new issuance has occurred since then. In June 2009, a legislation (“Equal Treatment of Covered Bonds Act 2009”) was proposed in the US. The two main aims of the proposed legislation are to provide a statutory scheme for the treatment of covered bonds in a post bankruptcy scenario (i.e. strengthening of the preferential treatment of covered bondholders) as well as an extension of damages payable by the FDIC (to cover also reinvestment losses) in case of repudiation of the mortgage bond contracts. Although the introduction of such legislation would not cover the same aspects as covered bond legislations in other countries, it would further strengthen the basis for a re-start of a covered bond market. We would also expect the existing two issuers to complete the conversion of their programmes once the legislative process is finalised.

US Covered Bonds – Rating Overview Issuer US Covered Bonds Unsecured Debt (Mortgage

Bond Issuer) S&P Moody’s Fitch S&P Moody’s Fitch

BAC AAA (S) Aa1 (D) AAA (S) A (S) A2 (S) A+ (S)

JPM AAA (N) n.r. AA+ (S) AA- (N) (N)



Outstanding US CB By Issuer (Sep 09) Jumbo US CB Maturity Profile (Sep 09)

0

1

2

3

4

5

6

7W

M

BAC

EUR bn

0

1

2

2010 2011 2012 2013 2014 2015 2016 2017

€bn



Appendix Austrian Fund. Anleihen Austrian Pfandbriefe Canadian Covered Bond Danish SDO Dutch Covered Bonds Finnish Covered Bonds

Special Bank Principle No Yes No No No Yes

Eligible collateral Mortgages and public sector debt

Mortgages and public sector debt

Mortgages Mortgages and public sector debt

Mortgages Mortgages and public sector debt

LTV Commercial Mgt n.a. 60% n.a. 60% n.a. 60%

LTV Residential Mgt n.a. 60% 80% 80% 80% 60%

Derivatives as collateral Yes Yes Yes Yes Yes Yes

Substitute Collateral 15% 15% 10% 15% 10% 20%

Mandatory Over-Collateral Optional Yes Yes No Yes No Separate public & Mortgage collateral No Yes n.a. No n.a. Yes

Limit on outstanding CB No No Yes**** No No No

22(4) UCITS compliant Yes Yes No Yes Yes*** Yes

Source – BNP Paribas * Subject to trigger event **Issue specific approval from FSA required ***if registered **** OSFI limit of max 4% of total assets

French Obl. Fonc. French Covered Bonds French CRH German Pfandbriefe Hungarian Covered Bonds

Irish ACS

Special Bank Principle Yes No No No Yes Yes

Eligible collateral Mortgages, public sector debt and MBS

Mortgages Mortgages and MBS Mgt, publ. sector debt, ship mgt and aircraft fin

Mortgages Mortgages, public sector debt, ABS/MBS

LTV Commercial Mgt 60% n.a. n.a. 60% 60% 60%

LTV Residential Mgt 60%-80% 80% 90% 60% 70% 75%

Derivatives as collateral Yes Yes* No Yes Yes Yes

Substitute Collateral 15% 20% n.a. 10-20% 20% 15%

Mandatory Over-Collateral No Yes Yes Yes No Yes

Separate public & Mortgage collateral No n.a. n.a. Yes n.a. Yes

Limit on outstanding CB No No No No No No

22(4) UCITS compliant Yes No Yes Yes Yes Yes



Italian Obbligazioni Garantite

Luxembourg Lettres de Gage

Norwegian Covered Bond

Portuguese Covered Bonds

Spanish Cédulas Swedish Säkerställda Obligationer

Special Bank Principle No Yes Yes No No No

Eligible collateral Mortgages, public sector

debt and ABS/MBS Mortgages, public sector

debt, movable assets, ABS/MBS





LTV Commercial Mgt 60% 60% 60% 60% 60% 60%

LTV Residential Mgt 80% 80% 75% 80% 95% 75%

Derivatives as collateral Yes Yes Yes Yes Yes Yes

Substitute Collateral 15% 20% 20% 20% 5% 20-30%

Mandatory Over-Collateral No Yes No Yes (Mortgage) Yes No Separate public & Mortgage collateral No Yes No Yes Yes No

Limit on outstanding CB Yes No No No No No

22(4) UCITS compliant Yes Yes Yes Yes Yes Yes

Source – BNP Paribas * Subject to trigger event **Issue specific approval from FSA required ***if registered **** OSFI limit of max 4% of total assets UK Covered Bonds US Covered Bonds

Special Bank Principle No No

Eligible collateral Mortgages, ship mgt., publ. sector debt and MBS

Mortgages

LTV Commercial Mgt 60% n.a.

LTV Residential Mgt 80% 75% (best practice: 80%)

Derivatives as collateral Yes Yes

Substitute Collateral 15% 10%

Mandatory Over-Collateral Yes Yes

Separate public & Mortgage collateral No n.a.

Limit on outstanding CB Yes** No

22(4) UCITS compliant Yes No


RESEARCH DISCLAIMERS: Recommendation System: Type Terminology Horizon Credit Trend (1) Positive/ Stable/ Negative 6 months Investment Recommendation (2) Buy/ Add/ Hold/ Reduce/ Sell (*) Up to 6 months (1) Credit Trend is based on underlying Credit fundamentals, business environment and industry trends; (2) Investment Recommendations are as follows: (*) BUY – Maximise exposure based on improving financial profile and/or significant under-valuation.

ADD – Overweight exposure within industry sector/index, based on improving financial profile, and/or defensive characteristics and/or cheap valuation. HOLD – Maintain position based on stable credit fundamentals and/or average expected return characteristics within peer group. REDUCE – Underweight exposure within industry sector/index based on weakening financial profile, increased volatility and/or rich valuation.

SELL – Sell exposure/Maximise protection largely based on deteriorating credit fundamentals, negative headline/event risks and/or significant over-valuation.

IMPORTANT DISCLOSURES: BNP Paribas is acting as Bookrunner in the issue of securities for Allied Irish Bank, Bank of Ireland and Danske Bank. The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribas group company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material contained in this report. All estimates and opinions included in this report are made as of the date of this report. Unless otherwise indicated in this report there is no intention to update this report. BNP Paribas SA and its affiliates (collectively “BNP Paribas”) may make a market in, or may, as principal or agent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in the issuers mentioned in this report, including a long or short position in their securities and/or options, futures or other derivative instruments based thereon, or vice versa. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any issuer mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any issuer referred to in this report. BNP Paribas may be a party to an agreement with the issuer relating to the production of this report. BNP Paribas may, to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from or in relation to an issuer mentioned in this report. Any issuer mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. Information about conflicts of interest relevant to this report is available at the BNP Paribas Global Markets website at: https://globalmarkets.bnpparibas.com/fiweb/ResearchPolicy.html BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des Italiens, 75009 Paris. This report was produced by a BNP Paribas group company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations. Analyst Certification: Each analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the analyst’s personal views about any and all of the issuers and securities named in this report, and (ii) no part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein. Certain countries within the European Economic Area: This report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. This report has been approved for publication in the United Kingdom by BNP Paribas London Branch. BNP Paribas London Branch is authorised by CECEI and AMF and authorised and subject to limited regulation by the Financial Services Authority. Details of the extent of our authorisation and regulation by the Financial Services Authority are available from us on request. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the CECEI and the AMF, whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, the New York Stock Exchange and other principal exchanges. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Registered Institution by Hong Kong Monetary Authority for the conduct of Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance. © BNP Paribas (2009). All rights reserved.

Covered Bond Watch 28.09.2009

Documents

Transcript of Covered Bond Watch 28.09.2009