European Covered bonds : the French Flair…
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European Covered bonds : European Covered bonds : the French Flair…the French Flair…
Stockholm
Thursday, March 29, 2007
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HistoryHistory
1767 : Introduction in Prussia (Landschaften)
1900 : Codification of the modern Pfandbriefe market (“Hypotehkenbankgesetz”)
1988 : European UCITS Directive: Definition of “Covered Bonds” The issuer must be a credit institution The issuance of covered bonds has to be governed by a special legal framework The issuance of covered bond must be subject to special prudential public supervision The set of eligible cover assets must be defined by law The cover assets pool must provide sufficient collateral to cover bondholder claims throughout the
whole term of covered bond Bondholders must have priority claim on the cover assets pool in case of default of the issuer
1999 : Enforcement of the French Law
For over 200 years, no defaults have been documented
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100
150
200
250
Jan-98 Oct-98 Oct-99 Jan-01 Sep-02 Apr-04 Jun-05 Jun-06
bn
Deposit Liabilities
Loans for housepurchasing
Globalisation of the covered bond market Globalisation of the covered bond market
19991999
1999 1997
19971995
1998
19981995
1993
Legislation in countries of the
EU/EEA/CH
European credit institutions liquidity gap
Oustanding volume Jumbo covered bond
0
50
100
150
200
250
300
350
1995 1996 1997 1998 1999
France
Spain
Germany
bn
Jumbo covered bond issue volumes
0
20
40
60
80
100
120
140
1995 1996 1997 1998 1999
France
Spain
Germany
bn
4
2004
20072007
A strong predominance of specific domestic A strong predominance of specific domestic legislationslegislations
23
29
2
4
Legislation in countries of the
EU/EEA/CH
Legislation under
consideration
Legislation in future EU
member and further
countries in
4
Concrete legislation in preparation
19
2007
1993
1999
2005
2005 1997
1995
19971995
1998
20031998
2000
2004
2006
2003
2002
2004
2004
2006
Structured covered bonds
2006
2007
bn
Oustanding volume Jumbo covered bond
0
100
200
300
400
500
600
700
800
900
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Other
IrelandFrance
SpainGermany
bn
Jumbo covered bond issue volumes
0
50
100
150
200
250
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UKLuxembourgAustriaItalyNetherlandFinlandUSASwedenPortugalNorwayIrelandFranceSpainGermany
5
Bonds spreads on March 20th
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
2006 2008 2010 2012 2014 2016 2018 2020 2022
BNPP
Poly. (OF)
Poly. (CRH)
Mortgage assets via RMBS senior tranches
Outstanding €14bn
2006 issuance €2.5bn
2007 plan €3 bn
Public sector/Local authorities assets
Outstanding €48bn
2006 issuance €12.1bn
2007 plan €16 bn
Mixed assets: Public/Mortgage
Outstanding €64bn
2006 issuance €17.2bn
2007 plan €20/25bn
The French flair….The French flair….
And 2 structured Bonds models
As of today, three existing « Société de Crédit Foncier »:
Assets: Mortgage
Outstanding €26bn
2006 issuance €7.2bn
Assets: Mortgage
Outstanding €4.5bn
2006 issuance €2.5bn
2007 plan €5/6 bn
Structured covered bonds
Obligations foncières
6
-3
-1
1
3
5
7
9
01
/01
/07
16
/01
/07
31
/01
/07
15
/02
/07
02
/03
/07
17
/03
/07
Wamu 10 ans B&B 10 ans OF 10 ans
The French model has proven its robustnessThe French model has proven its robustness
Performance against the others covered bonds assets classes The OFs are the most expensive notes among European bonds
Strong stability in credit crisis or market volatility contexts
German banking crisis
Flight to quality paper in case of credit crisis (GM)
US and UK structured bonds suffered from US sub-prime market turmoil
-5
0
5
10
15
20
janv
-00
mai
-00
sept
-00
janv
-01
mai
-01
sept
-01
janv
-02
mai
-02
sept
-02
janv
-03
mai
-03
sept
-03
janv
-04
mai
-04
sept
-04
janv
-05
mai
-05
sept
-05
janv
-06
mai
-06
sept
-06
OF 10 yrs Pfanbriefe 10 yrs
-6
-4
-2
0
2
4
6
8
01/0
7/20
03
01/1
0/20
03
01/0
1/20
04
01/0
4/20
04
01/0
7/20
04
01/1
0/20
04
01/0
1/20
05
01/0
4/20
05
01/0
7/20
05
01/1
0/20
05
01/0
1/20
06
01/0
4/20
06
01/0
7/20
06
01/1
0/20
06
01/0
1/20
07
150
200
250
300
350
400
15 per.Mov.Avg. Itraxx Xover
15 per. Mov. Avg. (IboxxFrance covered)
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The French Legal Framework: the best survivorThe French Legal Framework: the best survivor
Exclusive purpose of SCF
Geographical zone of the eligible assets: EEA countries,
Specialisation
Protection
No ALM Position
Strong Controls
Permanent mandatory over-collateralization
Bankruptcy remoteness from the parent company and a legal Privilège
Satisfactory level of congruence of rate
Satisfactory level of congruence of maturities
Contrôleur spécifique (special external auditor) + Commission Bancaire Legal Auditors
Rating Agencies
199
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8the French Legal Framework: a Darwinian the French Legal Framework: a Darwinian modelmodel
200
120
03
200
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Enlargement of eligible assets (both public sector loans and mortgage / guaranteed housing loans to USA, Canada, Japan and Switzerland
The transfer of receivables (including future receivables) on public debtors to an SCF is enforceable against third parties "notwithstanding the opening of insolvency proceedings against the originator".
The law will change soon with the implementation of the "equity capital" directive (revised EC directive 2000/12), as the implementation text further extends
the definition of eligible public receivables to all types of "exposures to or guaranteed by" public entities.
and the share of guaranteed housing loans raise from 20 to 35% of SCF
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A covered bond along UCITS directive definitionA covered bond along UCITS directive definition
Regulated covered bonds (Société de Crédit Foncier)
Structured Covered Bonds
Specific control / fiduciary supervision organized by law
Yes No - no specific controller/trustee and no special regulatory supervision
Eligible assets defined by a specific framework
Yes strict legal framework
No – pure contractual creation sui generis between the SPV and the borrower
Legal priority and preferential payment
Yes No – no specific provision in the law
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European Covered Bonds Mix (1/3)European Covered Bonds Mix (1/3)
Germany France Luxembourg Spain Ireland
Name of bonds Pfandbriefe Obligations foncières (OF) Lettres de gage (LG) Cédulas Asset Covered Securities (ACS) Covered Bonds Issuers ‘pure’ mortgage bank, often a
commercial bank subsidiary, or “mixed” mortgage bank; or public sector issuer, ship mortgage bank
Special Purpose vehicle: société de crédit foncier –SCF-, which enjoys the status of a finance company, likely a bank subsidiary
lettres de gage issuing bank must be a mortgage bank
Generally a bank or a savings bank
Financial institution designated by the Central Bank of Ireland as a “mortgage credit institution” and/or “public credit institution”
Special banking principle No Yes Yes No Yes, limited (10% of assets)
Type of bond issued 2 categories: public (öffentliche) / mortgage
(hypotheken)
one category 2 categories: public-sector / mortgage
2 categories:public (cédulas territoriales CT) / mortgage (cédulas hipotecarias CH)
two categories: public-sector /
mortgage Structure of instrument Cover assets remain on the
mortgage bank’s balance-sheet, but they are segregated in two separate pools: mortgage and public sector
Cover assets (mainly loans granted by the SCF or sold by a parent-bank) are on the SCF’s balance-sheet, but remain consolidated by the parent
Cover assets remain on the LG issuing bank’ balance-sheet, but they are segregated in two separate pools: public sector and mortgage
Cover loans remain on the bank’s balance-sheet
Cover assets remain on the balance-sheet of the designated institution, but they are segregated in two separate pools: public sector and mortgage
Collateralisation structure Fungible: for each of the two categories of Pfandbriefe, the aggregate outstanding is backed by the aggregate amount of assets comprised in the corresponding pool
Fungible: the aggregate amount of OFs is backed by the aggregate amount of loans, whether of the same nature or not
Fungible: for each of the 2 categories of LGs, the aggregate outstanding is backed by the aggregate amount of assets comprised in the corresponding pool
Fungible: the aggregate amount of CHs is backed by the whole portfolio of mortgage loans, the aggregate amount of CTs is backed by the aggregate amount of public sector eligible loans
Fungible: for each of the two categories of ACS, the aggregate outstanding is backed by the aggregate amount of assets comprised in the corresponding pool
Nature of eligible real estate loans
First mortgage loans financing residential or commercial real estate
First mortgage loans or guaranteed loans financing residential or commercial real estate
First mortgage loans financing residential or commercial real estate
First mortgage loans financing residential or commercial real estate
First mortgage loans financing residential or commercial real estate (commercial limited to 10% of pool)
Eligible mortgage sector
loans
EEA, and Switzerland EEA, French overseas territories, G7
OECD (without any restriction) Spain EEA (no limits) + G7 (limited 15% of pool)
Eligible public sector loans EC, EEA, G7, EIB,EBRD, Worldbank
EEA, G7 OECD (without any restriction)
EEA EEA (no limits) +G7 (limited 15% of pool)
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European Covered Bonds Mix (2/3)European Covered Bonds Mix (2/3)
Germany France Luxembourg Spain Ireland
Maximum LTV for mortgage
loans
60% loans with a greater ratio are limited to 20% of the mortgage loan portfolio for pure mortgage banks
60% for commercial real-estate 80% for residential real-estate (with conditions) 100% for State guaranteed loans SCFs are not allowed to grant loans beyond these ratios
60%
70% for commercial mortgages 80% for residential mortgages
60% for commercial mortgages 75% for residential real estate 80% on average for the issuing bank
Eligibility of MBS No Yes (EEA, G7) No No No Substitute collateral Up to 10% of total
outstanding Pfandbriefe Up to 20% of SCF’s assets (30%
on temporary dispensation) For both pools, up to 20%
of the outstanding LGs No For both pools, up to 20% of
the pool’s total assets Minimum Over-
collateralisation
Yes, 2% minimum over-collateralisation
Yes, mandatory, amount not set by law: sum of risk weighted
assets must be higher than the total amount of preferential
resources(OF and hedging tools)
Yes, in practice But not required by law (1-
for-1 requirement)
Yes, mandatory A 11% minimum for CHs A 43% minimum for CTs
Prudent market value of the cover assets must be higher than the outstanding volume of ACS
Possibility of early loan
repayment
Yes, but penalty fine is prohibitive
Yes Yes Yes Yes
Protection against
mismatching (incl interest
rate currency and maturity risks
Yield of cover assets must be at least as high as the interest paid on Pfandbriefe Maturity of mortgage Pfandbriefe should not exceed the maturity of the cover assets Net present value loss due to a shift or twist in the yield curve by 100bp should not exceed 10% of the company’s equity(traffic light model)
No quantitative requirement, but congruence checked by the specific auditor Currency mating between cover assets and OFs is required Each time a SCF issues a Jumbo OF its external auditor has to insure that the SCF manages properly its interest rate and maturity risks.
Cover requirement in terms of interest Currency risks must be hedged
Not required by law Duration of the ACS must not be higher than the duration of the assets in the cover pool and the duration of the cover pool must not be more than three years higher than the ACS duration, Interest receivable on the assets in the cover pool in a given period of twelve months must be higher than the interest payable on ACS that period
Public oversight on a regular basis
Banking regulator (BAFin) & security trustee
Banking regulator (Commission Bancaire) & specific independent auditor
Banking regulator Banking regulator (Bank of Spain)
Banking regulator (Central Bank of Ireland) & Cover Asset Monitor
Preferential claim in the event of issuer bankruptcy
Yes on all assets of the cover pool, before any other creditor, up until their full repayment; if they are insufficient, the Pfandbriefe holders have a legal claim on the issuer’s other assets, pari passu with the senior debt holders
Yes on all the SCF’s assets, before any other creditor, until they have been fully repaid
Yes on all the assets of the cover pool, before any other creditor, up until their full repayment; if they are insufficient, the LG holders have a legal claim on the issuer’s other assets, pari passu with the senior debt holders
Yes, on the total mortgage portfolio/eligible public
sector loan portfolio, before any other creditor except for
the tax authorities and the employees. If mortgages
/ eligible public sector loans are insufficient, the CH/CT holders have a lien on the
other assets, pari passu with other creditors.
Yes on all the assets of the cover pool, before any other creditor, up until their full repayment; if they are insufficient, the ACS holders have a legal claim on the issuing bank’s other assets, pari passu with the senior debt holders
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European Covered Bonds Mix (3/3)European Covered Bonds Mix (3/3)
Germany France Luxembourg Spain Ireland
Bankruptcy segregation of
the instrument in case of issuer’s default
Yes: the Pfandbriefe and the
collateral assets are isolated
Yes: the OFs and the collateral
assets are isolated
Yes: the LGs and the collateral
assets are isolated
No: Propagation of an issuer’s
default to the CHs/ CTs
Yes: the ACS and the collateral
assets are isolated
Bankruptcy segregation
from the parent
Yes Yes No No Yes
Repayment of bonds on their contractual date, even
should the issuer default
(= no acceleration of
payment)
Yes Yes Yes No Yes
Hedging derivatives:
inclusion in the collateral
and benefit from the privilege
Yes, limited to 12% of pool Yes Yes No Yes
Ceiling of the outstanding
bonds
None
None 60 x equity 90% of eligible loans for CHs 70% of eligible loans for CTs
50 x equity
Compliance with Article 22-4 of the 1985 ED on
investment
Yes Yes Yes Yes Yes
Risk weighting 10% 10% 10% 10% 10%
Upper limit on one single issuer for UCITS (according
to the 1985 ED)
25% (20% in Germany)
25% (25% in France)
25% (25% in Luxembourg)
25% (10% in Spain)
25%
Upper limit on one single issuer for insurers
(according to the 1990 and
1992 EDs)
40% (30% in Germany)
40% (10% in France)
40%
40% (10% in Spain)
40%
Eligibility for refinancing at the ECB (Tier 1 category)
Yes Yes Yes Yes Yes
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DisclaimerDisclaimer
This document has been prepared by Société Générale for information purposes only.
Société Générale does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon statistical services or other third party sources.