20110222 credit agricole covered bonds
TRANSCRIPT
Credit Focus CREDIT RESEARCH / COVERED BONDS 22 February 2011
research.ca-cib.com Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request.
Overview of covered bond legal frameworks
Contents
Risk factors and life cycle of a covered bond
Main issuance structures in the covered bond market
What the agencies think – comparing ratios per country
Country sections
Risk factors and life cycle of a covered bond Risk factors affecting covered bonds pre and post insolvency Pre issuer insolvency Post issuer insolvency Post covered bond insolvency Credit risk of the issuer Legal/structural risk in segregation process Asset risk (NPLs, recoveries) Supervision (general + special) Pool management risk Market risk Asset eligibility criteria (conflicts of interest if only one administrator
for the bank + covered bonds) Counterparty risk (derivatives, liquidity support)
Underwriting standards Supervision (special) Cover pool servicing (ie, treatment of NPLs)
Counterparty risk (derivatives, liquidity support)
Counterparty risk Market risk Market risk (any limits?) Liquidity risk (cash reserves, access to
funding post insolvency, etc.)
Liquidity risk (any limits?) Asset risk (NPLs, recoveries) Source: Crédit Agricole CIB
Life stages of a covered bond
Coupon payments + redemptions
Other liabilities +
equity
Structure post issuer insolvency
Other liabilities +
equity
Other assets
Structure pre issuer insolvency Structure post covered bond insolvency
Cover poolCovered
bonds
Florian Eichert, CFA, Senior Covered Bond Analyst +44 (0)20 7214 6402 [email protected]
Source: Crédit Agricole CIB
Cover poolCovered
bonds
Other assets
Cover poolCovered
bonds
Other liabilities +
equity
Covered bond investors
Bank (issuer) Other assets
Covered bond investors
Cover pool
Adminis-trator
Insol-vency
Adminis-trator
Separation Separation
Coupon payments + redemptions Recovery
Covered bond investors
Default. Payments have stopped, investors receive the recoveries
Cover pool
Adminis-trator
Insol-vency
Adminis-trator
No default. Payments are made as scheduled
Credit Focus
22 February 2011 2
Main issuance structures in the covered bond market Universal bank model
Traditional issuance model with the segregation taking place on the balance sheet of the issuer
This is the traditional covered bond issuance model. Cover pool business is done alongside non-eligible banking business. The issuer segregates the cover pool on balance. In the event of insolvency, the pool and outstanding covered bonds are separated from the ordinary insolvency estate. This way of issuing covered bonds is in use in the following countries:
Austria, Denmark (not the case for mortgage banks though), Finland, Germany, Portugal, Spain, Sweden
Structural diagram: universal bank model
Source: Crédit Agricole CIB
Investor
Bank
Equity + other liabilities
Other assetsOver-
collaterali-sation
Strengths:
Covered bond investors have a residual claim on the remaining assets of the bank pari passu to senior unsecured creditors should the cover pool not be sufficient to cover all claims
Main challenges:
Clear segregation of cover pool assets on balance sheet
Clear separation of cover pool assets plus covered bonds post insolvency of the issuer
Specialised bank model Specialised banks which are subsidiaries of universal banks issue covered bonds. The cover pool assets are transferred to these issuers from their parents. In the event of insolvency of the mother company, the issuer ideally stays solvent. It can still operate as a normal bank, only the steady inflow of new cover assets has stopped. This way of issuing covered bonds is in use in the following countries:
Denmark (in the case of mortgage banks), Finland, France, Ireland, Luxembourg, Norway
Subsidiaries of universal banks issue
Issue
Covered BondsSubstitute assets
Cover assets
Security
Credit Focus
22 February 2011 3
Structural diagram: specialised bank model
Source: Crédit Agricole CIB
Strengths:
No potential for commingling of cover pool assets and the remaining assets on balance sheet of the issuer as the separation has already taken place
Ideally, the issuer survives the insolvency of the mother company and remains a fully functioning entity
Main challenges:
Funding of the OC. If done through the mother company, insolvency of the mother company could automatically lead to insolvency of the issuer
Usually no claim on the mother company’s assets – the residual unsecured claim is limited to the issuer’s balance sheet
Operating in a post-insolvency scenario if the issuer has no or nearly no staff
SPV guarantees issuance by a universal bank model This way of issuing came up with the first UK covered bonds by Bank of Scotland. A universal bank issues bonds which are in turn guaranteed by an SPV, to which the cover assets are transferred through an equitable assignment. In the event of insolvency of the issuer, the cover assets remain with the SPV, which pays covered bond holders from the cash flows generated by the pool. This way of issuing covered bonds is in use in the following countries:
Italy, Netherlands, UK
Structural diagram: SPV guarantees universal bank issuance model
Source: Crédit Agricole CIB
Universal bank issues, SPV guarantees
Mortgage Bank
Equity + Sub liabilities
Cover assets
Covered Bonds Issue Investor
Over-collaterali-
sation
Assets incl. shares in Mortgage Bank
Liabilities
Bank
If loans are originated by the mother, sale and transfer of cover assets
Security
Bank
Equity + other liabilities
Other assets
Cover assetsCovered Bonds Issue
Over-collaterali-
sation
Guarantee
Cover assets
Investor
Sale through equitable assignment
Liabilities
SPV
Credit Focus
22 February 2011 4
Strengths:
No potential for commingling of cover pool assets and the remaining assets on balance sheet of the issuer as the separation has already taken place pre insolvency of the issuer
Covered bond investors have a residual claim on the remaining assets of the bank pari passu to senior unsecured creditors should the cover pool not be sufficient to cover all claims
Main challenges:
Liquidity generation post insolvency as the assets are held by an SPV, which can rely only on the cash flows that are generated by the cover assets and the trustee selling assets from the pool
What the agencies are thinking – comparing ratios per country Fitch
D-Factor measures the delinkeage between issuer and covered bond
The D-Factor from Fitch measures the degree of delinkage between issuer and covered bond. In short, it states the probability with which Fitch expects the covered bonds to go into default following an issuer default. It can range from 0% to 100%. The quality of the legal framework plays a major role in this; however, market-related factors such as ALMM mismatches are also relevant. For example, the agency evaluates not only the law as such but also the likelihood with which issuers can actually make use of legal provisions such as issuing new bonds or taking out loans to bridge liquidity gaps. This is one of the main reasons why Portuguese D-Factors have been increased significantly in the course of the recent months, for example, even though the law did not change.
Minimum, mean and average D-Factors per country, as at 03/02/11
0%
25%
50%
75%
100%
CA
N
CH
E
DE
U -
PS
DE
U -
M
DN
K
ES
P
FRA
- P
S
FRA
- M
GB
R -
PS
GB
R -
M
GR
C
IRL
- PS
IRL
- M ITA
LUX
NLD
NO
R
NZL
PR
T - P
S
PR
T - M US
A
Mean
Source: Fitch, Crédit Agricole CIB
Moody’s
Moody’s TPI is the agency’s opinion about timely payment on covered bonds after the default of the issuer
Moody’s Timeliness Payment Indicator gives the agency’s opinion about timely payment on covered bonds after the default of the issuer. It is quite similar to Fitch’s D-Factor only that Moody’s does not express it in percentage terms but classifies covered bond programmes into six categories. As with Fitch, the legal framework is only the starting point. Pool characteristics also play a role, which is why different programmes in one country can have different TPIs.
That TPIs can also change over time became very obvious with Irish Mortgage ACS being shifted to the ‘very improbable’ bucket recently. Only in October 2010, Moody’s still had a TPI of ‘probable’ for Mortgage ACS.
Credit Focus
22 February 2011 5
Average TPIs of jumbo covered bonds per country Very high High Probable / High Probable Improbable Very Improbable
Austria (Public Sector) France (Obligations Foncieres) Austria (Mortgage) Portugal GreeceGermany (Public Sector) Germany (Mortgage) Denmark Hungary
Ireland (Public Sector ACS) Finland Ireland (Mortgage ACS)Norway France (Structured)Spain (Cedulas Territoriales) Italy
NetherlandsSpain (Ced. Hip.)SwedenSwitzerlandUK
Source: Moody’s, Crédit Agricole CIB
S&P
S&P categories take into account the strength of the law as well as the significance of covered bonds to that specific economy
S&P categorises covered bond markets into covered bond categories. Besides the quality of the legal framework, it also incorporates systemic importance (ie, the size and history of the respective markets). A fairly new market will therefore never be able to get into category 1 irrespective of the quality of the law. The size and history argument is also a main reason for Spain to be in category 1 even though we would rate the quality of the legal framework as being below average in a European context. As opposed to the Fitch and Moody’s ratios above, S&P’s covered bond categories don’t differ between issuers from a given country. Cover pool specific factors are addressed through the asset liability mismatch (ALMM) risk score.
Covered bond categories by country
Category 1 Category 2 Category 3Jurisdictions Denmark Canada Greece
France ("Obligations Foncières") Finland U.S.Germany France ("Structured Covered Bonds")Spain Ireland
ItalyLuxembourgThe NetherlandsNorwayPortugalSwedenU.K.
Maximum potential number of notches uplift from the ICR
5 to 7 4 to 6 3 to 5
Source: S&P, Crédit Agricole CIB
Credit Focus
22 February 2011 6
Austria – Pfandbriefe + Fundierte Schuldverschreibungen Issuance structure and overview
Issuance structure Pfandbriefe Source: ECBC, Crédit Agricole CIB
Investor
Substitute assets
Bank
Equity + other liabilities
Other assets
Mortgage cover assets
Hypotheken-pfandbriefe
Issue
Security
Over-collaterali-
sation
Public sector cover assetsOver-
collaterali-sation
OeffentlichePfandbriefe
Substitute assets
IssueSecurity
Legal basis Mortgage Banking Act (1899, last amended: 2005)
Law on Secured Bank Bonds (1905, last amended: 2005)
Mortgage Bond Act (1927, last amended: 2005)
Legal framework strengths Conservative valuation of mortgage assets through the use of the mortgage
lending value and 60% LTMV limits
Strong involvement of the supervisory authority both pre and also post insolvency
Separate administrator for the cover pool / covered bonds post insolvency
Legal framework weaknesses Covered bond investors have a claim only on the first 60% of the LTMV
All three laws prescribe only nominal 2% overcollateralisation of outstanding covered bonds
Credit Focus
22 February 2011 7
Overview of legal framework
Product Austrian Covered BondsStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution with a special licenceWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Residential + Commercial)Geographical scope Mortgage assets + Public sector assets: EEA, CHMixed pools possible? NoLimit on substitute assets 15%ValuationMaximum LTVs Commercial, Residential, Agricultural: 60%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
No
ALM guidelinesMinimum OC 2%Type of coverage test NominalIs OC above the minimum protected? YesMitigation of market risk Natural matching + stress testingMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly or
via a special administratorInvolved in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency (of the mother company)?
Cash flows from the pool, sale of cover assets, take out loans
Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? YesUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.pfandbriefforum.at
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 8
Denmark – Saerligt Daekkede Obligationer Issuance structure and overview
Issuance structure through specialised mortgage banks
Issuance structure through universal banks
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis Danish Act on covered bonds (2007)
Legal framework strengths Very strict matching principle between assets and liabilities
Under the general balance principle, OC requirements are linked to the amount of risk (interest, currency, option and liquidity risk) in the pool
Separate administrator for the cover pool / covered bonds post insolvency
Administrator can access liquidity post insolvency of the issuer by taking out loans
Legal framework weaknesses No separate, independent cover pool monitor (monitoring is done by the
issuers themselves as well as the Danish FSA)
Fairly wide geographical scope for cover assets
Investor
Capital centre A
Mortgage Bank
Equity (8% of RWA)
Investor
Capital centre A
Universal Bank
Equity + other liabilities
Other assets
All SDOs backed by capital centre A
Issue
Security
Over-collaterali-
sation
Over-collaterali-
sation
All SDOs backed by capital centre X
Capital Center X
IssueSecurity
All SDOs backed by capital centre A
Issue
Security
Over-collaterali-
sation
Over-collaterali-
sationAll SDOs backed by
capital centre X
Capital Center X
Issue
Security
Equity (8% of RWA)
Credit Focus
22 February 2011 9
Overview of legal framework
Product Saerligt Daekkede ObligationerStructureWhat is the legal basis? Special lawWho is the issuer? Specialised mortgage banks as well as universal credit institutions
with a special licenceWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Residential + Commercial)Ship loans (not eligible in the case of mortgage banks)
Geographical scope Mortgage assets + Public Sector assets: EEA, CH, USA, Canada, Japan, OECD, NZ, AUS
Mixed pools possible? YesLimit on substitute assets 15%ValuationMaximum LTVs Commercial: 60%, Agricultural: 60%, Ships: 70%,
Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 0% (8% of risk weighted assets for mortgage banks)Type of coverage test NPV + Stress testIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk “Natural” matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly or
via a special administratorIs there an independent cover pool monitor? NoSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assets, take out loansRecourse to the credit institution's insolvency estate? Yes, pari passu (senior in the case of mortgage banks) to senior
unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? YesUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.realkreditraadet.dk
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 10
Finland – Finnish Covered Bonds Issuance structure and overview
Issuance structure through specialised mortgage banks
Issuance structure through universal banks
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis Covered Bond Act / CBA (688/2010)
Legal framework strengths Conservative LTV limits
10% limit on commercial mortgages
Strong involvement of the supervisory authorities both pre and also post insolvency
Separate administrator for the cover pool / covered bonds post insolvency
Administrator can access liquidity post insolvency of the issuer by taking out loans
Legal framework weaknesses New law will apply only to covered bond issues from August 2010 onwards.
The old covered bonds will still be governed by the old covered bond law. Issuers will have two separate cover pools and two separate covered bond curves
No transparency requirements by law
Mortgage Bank
Equity + Sub liabilities
Cover assets
Finnish Covered Bonds
Issue Investor
Over-collaterali-
sation
Assets incl. shares in Mortgage Bank
Liabilities
Bank
Investor
Bank
Equity + other liabilities
Other assets
Issue
Cover assets
Over-collaterali-
sation Finnish Covered Bonds
Substitute assets
Security
If loans are originated by the mother, sale and transfer of cover assets
Security
Credit Focus
22 February 2011 11
Overview of legal framework
Product Finnish Covered BondsStructureWhat is the legal basis? Special lawWho is the issuer? Special as well as universal credit institution with a special licenceWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Commercial mortgages max. 10%)Loans to housing associations without mortgage
Geographical scope Mortgage assets: EEA Public Sector assets: EEA, outside EEA (if step 1 rating, max 20% if step 2 rating)
Mixed pools possible? YesLimit on substitute assets 20% (the Finnish FSA can allow this to be increased in individual
cases)ValuationMaximum LTVs Commercial: 60%, Residential: 70%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? Yes (100%)If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 2%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assets+ liquidity
facilitiesSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly or via a
special administratorIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?
Preferential claim by law, specific cover pool administration
Is there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency (of the mother company)?
Cash flows from the pool, sale of cover assets, take out loans
Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 12
France – Obligations Foncières (OF) and Obligations à l’Habitat (OH) Issuance structure and overview
Issuance structure Obligations Foncières Obligations à l’Habitat
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis Articles L.515-13 et seq. of the French Monetary and Financial Code
Legal framework strengths Transfer of assets has already taken place pre insolvency
The value of guaranteed home loans and RMBS in the pool is adjusted downward by 50% if the rating of the tranche / the guarantor falls below AA-/Aa3 and to 0% if the rating falls below A-/A3
Strong involvement of the supervisory authorities both pre and also post insolvency
Separate administrator for the cover pool / covered bonds post insolvency
After an insolvency of the mother company, the SCF can sell assets, take out loans, issue bonds and has access to the central bank to generate liquidity
Issuers have to hold cash covering coupon and principal payments occurring within the next 180 days
For OHs, covered bond investors have a residual senior unsecured claim against the sponsor/parent bank should the cover assets not be sufficient to pay back covered bond investors in full (this is based on the loan from the SFH to the sponsor/parent bank)
Legal framework weaknesses Slightly wider eligible cover asset definition than the CRD (external RMBS
are cover pool eligible as well as guaranteed home loans)
For OHs, there is no limit on home loans guaranteed by internal guarantors (for OF, there is a limit of 35% on guaranteed home loans, no internal guarantors are eligible)
For OFs, little value of the residual senior unsecured claim to the issuer (SCF) as there are practically no other assets outside the cover pool and no recourse to the mother company exists
Substitute assets
Société de Financement à l’Habitat (SFH)
Equity + Sub liabilities
Claim on mother company Obligations à Habitat Issue Investor
Assets incl. shares in SFH
Liabilities
Bank
Housing loans Loan from SFH
Security
Pledge
ClaimSociete de credit foncier (SCF)
Equity + Sub liabilities
Cover assets
Obligations Foncieres Issue Investor
Over-collaterali-
sation
Assets incl. shares in SCF
Liabilities
Bank
If loans are originated by the mother, sale and transfer of cover assets
Security
Credit Focus
22 February 2011 13
Overview of legal framework Product Obligations Foncieres Obligations HabitatsStructureWhat is the legal basis? Special law Special lawWho is the issuer? Specialised credit institution Specialised credit institutionWho owns the cover assets? The issuer directly The issuer directly or with the mother company but
pledged to the issuer making use of the French adaptation of the European Collateral Directive
Cover AssetsEligible cover assets Exposures to public sector entities Home loans (including up to 100% guaranteed home
loans)Mortgage loans (commercial / residential, including up to 35% guaranteed home loans)
Promissory notes which represent a claim on housing loans
Group originated Senior MBS Group-originated Senior MBSSenior MBS issued by third parties Senior MBS issued by third parties
Geographical scope EEA, countries with step 1 rating EEA, countries with step 1 ratingMixed pools possible? Yes NoLimit on substitute assets 15% 15%ValuationMaximum LTVs Commercial: 60%, Residential: 80%, Mortgage +
government guarantee: 100%Residential: 80%, Mortgage + government guarantee: 100%
Basis for LTV calculation Mortgage lending value Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible?
No No
If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes Yes
ALM guidelinesMinimum OC 2% 2%Type of coverage test Nominal NominalIs OC above the minimum protected? Yes YesMitigation of market risk Natural matching + use of derivatives + stress testing Natural matching + use of derivatives + stress testingMitigation of liquidity risk Issuers have to hold 180 days worth of liquidity,
"natural" matching + stress testing + substitute assetsIssuers have to hold 180 days worth of liquidity, "natural" matching + stress testing + substitute assets
Supervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checks Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds?
Safeguarding ongoing management of the cover pool Safeguarding ongoing management of the cover pool
Involved in transfer of cover assets + covered bonds to another credit institution
Involved in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? Yes YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?
Preferential claim by law, specific cover pool administration
Preferential claim by law, specific cover pool administration
Is there a separate cover pool administrator in addition to the insolvency administrator?
Yes Yes
How can liquidity be generated post insolvency (of the mother company)?
Cash flows from the pool, sale of cover assets, issuance of bonds / loans, repo with the ECB
Cash flows from the pool, sale of cover assets, issuance of bonds / loans, repo with the ECB
Recourse to the credit institution's insolvency estate?
Yes, senior to senior unsecured creditors of the SCF Yes, senior to senior unsecured creditors of the SFH, pari passu to the senior unsecured creditors of the mother company
Do derivatives survive the insolvency of the issuer?
Yes Yes
How do derivatives counterparties rank vs. covered bond holders?
Pari passu with covered bond holders Pari passu with covered bond holders
Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law?
Yes, on a quarterly basis Yes, on a quarterly basis
UCITS 22(4) Yes YesCRD Yes PossibleRisk weight in the RSA 10% 10% possibleCovered bond association - - Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 14
France – Caisse de Refinancement de l’Habitat Issuance structure and overview
Issuance structure CRH bonds
Participating bank 1
Equity + other liabilities
Equity + sub liabilities Money market assets
Other assets
Caisse de Refinancement de l’Habitat (CRH)
Source: ECBC, Crédit Agricole CIB
Legal basis Article 13 of act 1985-695
Articles L. 313-42 to L. 313-49 of the French Monetary and Financial Code
Legal framework strengths With 25% very high legal minimum over-collateralisation
Only home loans eligible as collateral
On the level of CRH perfect pass-through between covered bonds issued and Billets de Mobilisation (only some matching requirements between issued covered bonds and the underlying mortgages though)
Participating banks have the obligation to supply additional capital should losses occur at the CRH level
Legal framework weaknesses Only annual disclosure required by law
In the event a participating bank defaults, and the pledged home loan portfolio is transferred to CRH, this might lead to unhedged ALM mismatches (remaining participating banks have to provide liquidity and capital to support the ongoing operations of CRH)
CRH covered bonds
Participating bank X
Equity + other liabilities
Other assets
Billet de Mobilisation (BDM)
Cover assets Billet de Mobi-
lisation (BDM)
Pled
ge Issue
Issue
Investor
Collateral
Cover assets
…Billet de Mobi-lisation (BDM)
Billet de Mobilisation (BDM)
Credit Focus
22 February 2011 15
Overview of legal framework
Product CRHStructureWhat is the legal basis? Special lawWho is the issuer? Specialised credit institutionWho owns the cover assets? The issuer directly (the assets are Billets de Mobilisation, the underlying mortgages remain
with the participating banks but are pledged to the issuer)Cover AssetsEligible cover assets Home loans (residential mortgages, including up to 35% guaranteed home loans)Geographical scope EEAMixed pools possible? NoLimit on substitute assets 0%ValuationMaximum LTVs Residential: 80%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible?
No
If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 25%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + stress testingMitigation of liquidity risk "Natural" matching + stress testing, liquidity facilitiesSupervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds?
No
Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?
Preferential claim by law
Is there a separate cover pool administrator in addition to the insolvency administrator?
No but CRH does not have any other material liabilities than covered bonds (OC has to be financed by the participating banks on their level)
How can liquidity be generated post insolvency (of one participating bank)?
Cash flows from the pool, sale of cover assets, liquidity and capital injections from the other participating banks
Recourse to the credit institution's insolvency estate?
Yes, pari passu to senior unsecured creditors of the participating banks
Do derivatives survive the insolvency of the issuer?
There are no derivatives on the level of CRH
How do derivatives counterparties rank vs. covered bond holders?
n/a
Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law?
Yes, on an annual basis
UCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 16
Germany – Pfandbriefe Issuance structure and overview
Issuance structure Pfandbriefe Source: ECBC, Crédit Agricole CIB
Investor
Substitute assets
Bank
Equity + other liabilities
Other assets
Mortgage cover assets
Hypotheken-pfandbriefe
Issue
Security
Over-collaterali-
sation
Public sector cover assetsOver-
collaterali-sation
OeffentlichePfandbriefe
Substitute assets
IssueSecurity
Legal basis Pfandbriefgesetz (2005) – last amended in March 2009
Legal framework strengths Conservative valuation of mortgage assets through the use of the mortgage
lending value and 60% LTMV limits
Detailed rules regarding the segregation of cover assets post insolvency
Over-collateralisation has to be met after stress tests for market-related risk factors
Issuers have to hold cash covering coupon and principal payments occurring within the next 180 days
Strong involvement of the supervisory authority both pre and also post insolvency
Separate administrator for the cover pool / covered bonds post insolvency
Transparency regulations prescribe quarterly statements
Legal framework weaknesses Covered bond investors have a claim on only the first 60% of the LTMV
Broad set of eligible cover assets allowed by law including airplane and ship mortgages (however, they are kept separate from the mortgage and public sector cover pools and do not form part of the collateral backing Hypothekenpfandbriefe or Oeffentliche Pfandbriefe)
Credit Focus
22 February 2011 17
Overview of legal framework
Product PfandbriefeStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution with a special licenseWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Residential and commercial)Ship loansAircraft loans
Geographical scope EEA, CH, USA, Canada, Japan, Multilateral development banksMixed pools possible? NoLimit on substitute assets 10%ValuationMaximum LTVs Residential, Commercial, Agricultural, Ships, Aircraft: 60%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
No
ALM guidelinesMinimum OC 2%Type of coverage test NPV + stress testIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk Issuers have to hold 180 days worth of liquidity, “natural” matching +
stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool
Involved in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assets, issuance of bonds / loans
Recourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holders
Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? Yes (quarterly)UCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.vdp.de
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 18
Ireland – Asset Covered Securities Issuance structure and overview
Issuance structure ACS
Source: ECBC, Crédit Agricole CIB
Legal basis Asset Covered Securities Bill, 2001
Asset Covered Securities (Amendment) Act 2007
Legal framework strengths Transfer of assets has already taken place pre insolvency
Strong involvement of the supervisory authorities both pre and also post insolvency
Separate administrator for the cover pool / covered bonds post insolvency
After an insolvency of the mother company, the ACS bank can sell assets, take out loans and has central bank access to generate liquidity
Legal framework weaknesses Transparency required only annually in the annual accounts of the ACS bank
Little value of the residual senior unsecured claim to the issuer (ACS bank) as there are only limited volumes of other assets outside the cover pool and there is no recourse to the mother company
ACS Bank
Equity + other liabilities
Cover assets ACSIssue Investor
Over-collaterali-
sation
Assets incl. shares in ACS bank
Liabilities
Bank
If loans are originated by the mother, sale and transfer of cover assets
Other assets
Security
Credit Focus
22 February 2011 19
Overview of legal framework Product Mortgage Asset Covered Securities Commercial Mortgage Asset Covered
SecuritiesStructureWhat is the legal basis? Special law Special lawWho is the issuer? Specialized credit institution Specialized credit institutionWho owns the cover assets? The issuer directly The issuer directlyCover AssetsEligible cover assets Residential mortgage loans Commercial mortgage loans
Max 10% commercial mortgage loans Internal +external senior MBSInternal + external senior MBS
Geographical scope EEA, Australia, Canada, Japan, New Zealand, Switzerland, USA
EEA, Australia, Canada, Japan, New Zealand, Switzerland, USA
Mixed pools possible? No NoLimit on substitute assets 15% 15%Valuation
Maximum LTVs Commercial: 60%, Residential: 75% 60%Basis for LTV calculation Market value Market valueIs there a LTV cap which makes the entire loan pool ineligible?
No No
If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes Yes
ALM guidelinesMinimum OC 3% 10%Type of coverage test Nominal NominalIs OC above the minimum protected? Yes YesMitigation of market risk Natural matching + stress testing + use of
derivativesNatural matching + stress testing + use of derivatives
Mitigation of liquidity risk "Natural" matching + stress testing + substitute assets
"Natural" matching + stress testing + substitute assets
Supervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond
specific checksGranting licences + regular covered bond specific checks
Special role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directlyInvolvement in transfer of cover assets + covered bonds to another credit institution
Safeguarding ongoing management of the cover pool directlyInvolvement in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? Yes YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?
Preferential claim by law, specific cover pool administration
Preferential claim by law, specific cover pool administration
Is there a separate cover pool administrator in addition to the insolvency administrator?
Yes Yes
How can liquidity be generated post insolvency (of the mother company)?
Cash flows from the pool, sale of cover assets, liquidity facility, mortgage backed promissory notes, central bank access
Cash flows from the pool, sale of cover assets, liquidity facility
Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditors Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? Yes YesHow do derivatives counterparties rank vs. covered bond holders?
Pari passu with covered bond holders Pari passu with covered bond holders
Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law?
Yes Yes
UCITS 22(4) Yes YesCRD Yes YesRisk weight in the RSA 10% 10%Covered bond association - - Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 20
Overview of legal framework
Product Public Sector Asset Covered Securities
StructureWhat is the legal basis? Special lawWho is the issuer? Specialized credit institutionWho owns the cover assets? The issuer directlyCover Assets
Eligible cover assets Exposures to public sector entitiesGeographical scope EEA, Australia, Canada, Japan, New Zealand, Switzerland, USA,
multilateral development banksMixed pools possible? NoLimit on substitute assets 15%ValuationMaximum LTVs -Basis for LTV calculation -Is there a LTV cap which makes the entire loan pool ineligible? -Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
-
ALM guidelinesMinimum OC 3%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + stress testing + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly
Involvement in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency (of the mother company)? Cash flows from the pool, sale of cover assets, liquidity facility, central bank access
Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? YesUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 21
Luxembourg – Lettres de Gage Issuance structure and overview
Issuance structure Lettres de Gage Source: ECBC, Crédit Agricole CIB
Assets incl. shares in specialised bank
Liabilities
Bank
If loans are originated by the mother, sale and transfer of cover assets
Investor
Substitute assets
Lettres de Gage Issuer
Equity + other liabilities
Other assets
Mortgage cover assets
Lettres de Gage Hypothécaire
Issue
Security
Over-collaterali-
sation
Public sector cover assetsOver-
collaterali-sation
Lettres de Gage Publique
Substitute assets
IssueSecurity
Legal basis Articles 12-1 to 12-9 of the Financial Sector Act (1993, amended in 2000 and
2008)
CSSF circular 01/42
CSSF circular 03/95
Legal framework strengths Transfer of assets has already taken place pre insolvency
Strong involvement of the supervisory authorities both pre and also post insolvency
Separate administrator for the cover pool / covered bonds post insolvency
Legal framework weaknesses Very broad eligible asset definition
Investors only have access to the first 60% / 80% of commercial / residential mortgage loans
No transparency requirements by law
Credit Focus
22 February 2011 22
Overview of legal framework
Product Lettres de GagesStructureWhat is the legal basis? Special lawWho is the issuer? Specialised credit institutionWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Residential + Commercial)Group originated Senior MBSSenior MBS issued by third partiesShip loansAircraft loansOther moveable asset loans
Geographical scope EEA, CH, USA, Canada, Japan, Multilateral development banks, OECD, NZ, AUS
Mixed pools possible? NoLimit on substitute assets 20%ValuationMaximum LTVs Commercial, Agricultural, Ships, Aircraft, Other moveable assets: 60%,
Residential: 80%Basis for LTV calculation Mortgage lending valueIs there a LTV cap which makes the entire loan pool ineligible? No
If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
No
ALM guidelinesMinimum OC 2%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool
Involved in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?
Preferential claim by law, specific cover pool administration
Is there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders?
Pari passu with covered bond holders
Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? No
UCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 23
Italy – Obbligazioni Bancarie Garantite Issuance structure and overview
Issuance structure Obbligazioni Bancarie Garantite
Bank
Equity + other liabilities
Other assets
Cover assets
Source: ECBC, Crédit Agricole CIB
Legal basis Law 80/2005
Law 130 on securitisations
Legal framework strengths Transfer of assets has already taken place pre insolvency
Banks have to fulfil additional capital requirements to be able to issue covered bonds (no issuance limit on covered bonds only if total capital ratio is above 11% and the tier 1 ratio above 7%)
Involvement of the Bank of Italy both pre and also post insolvency
Legal framework weaknesses No prescribed over-collateralisation by law, collateralisation required on an
NPV basis though
Broad set of eligible assets is allowed by law
No separate cover pool administrator post insolvency of the issuer
Administrator has to rely on cash flows from the pool and proceeds from selling pool assets to access liquidity post insolvency
No transparency requirements by law
OBG Issue
Over-collaterali-
sation
Guarantee
Cover assets
Investor
Sale and transfer
Liabilities
SPV
Credit Focus
22 February 2011 24
Overview of legal framework
Product Obbligazioni Bancarie GarantiteStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institutionWho owns the cover assets? SPE which guarantees the covered bondsCover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Commercial, residential)Group originated Senior MBSSenior MBS issued by third parties
Geographical scope EEA, SwitzerlandMixed pools possible? YesLimit on substitute assets 15%Valuation
Maximum LTVs Commercial: 60%, Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 0%Type of coverage test NPVIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk Natural matching + use of derivativesSupervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool
Involved in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool
administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
No
How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.abi.it
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 25
Netherlands – Dutch Registered Covered Bonds Issuance structure and overview
Issuance structure Dutch Registered Covered Bonds
Bank
Equity + other liabilities
Other assets
Cover assets
Source: ECBC, Crédit Agricole CIB
Legal basis Regulation on Amending the Regulation Implementing the Financial
Supervision Act
Decree of 3 June 2008 Regarding Covered Bonds
Legal framework strengths Transfer of assets has already taken place pre insolvency
Strong involvement of the Dutch Central Bank pre insolvency
Legal framework weaknesses No prescribed over-collateralisation by law
Broad set of eligible assets are allowed by law (CRD and non-CRD-compliant assets)
Administrator has to rely on cash flows from the pool and proceeds from selling pool assets to access liquidity post insolvency
No transparency requirements by law
Dutch Covered Bonds Issue
Over-collaterali-
sation
Guarantee
Cover assets
Investor
Liabilities
SPV
Sale and transfer
Credit Focus
22 February 2011 26
Overview of legal framework
Product Dutch regulated covered bondsStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institutionWho owns the cover assets? SPE which guarantees the covered bondsCover AssetsEligible cover assets Subject to DNB approvalGeographical scope EEA, US, Canada, Japan, the Republic of Korea, Hong
Kong, Singapore, Australia, New Zealand, SwitzerlandMixed pools possible? YesLimit on substitute assets n.a.Valuation
Maximum LTVs -Basis for LTV calculation -Is there a LTV cap which makes the entire loan pool ineligible? -If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 0%Type of coverage test NominalIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk Natural matching + use of derivativesSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? NoIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency (of the mother company)? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD PossibleRisk weight in the RSA 10% or 20% (depends on LTV limit)Covered bond association -
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 27
Comparison of Dutch covered bond programmes
ABN Amro Achmea ING Bank NIBC Bank SNS BankCovered Bond Ratings AAA / Aaa / AAA - / Aa2 / AAA AAA / Aaa / AAA - / Aa2 / AAA - / Aaa / AAAProgram volume in EUR bn 25 10 30 7 15Eligible assets Mortgages up to
EUR1.5mnMortgages up to EUR1.5mn
Mortgages up to EUR1.0mn
Mortgages up to EUR1.0mn
Mortgages up to EUR1.5mn
Geographical scope EEA, US, Canada, Japan, the Republic of Korea, Hong Kong, Singapore, Australia, New Zealand, Switzerland
Dutch and non-Dutch
EEA, US, Canada, Japan, the Republic of Korea, Hong Kong, Singapore, Australia, New Zealand, Switzerland
EEA, US, Canada, Japan, the Republic of Korea, Hong Kong, Singapore, Australia, New Zealand, Switzerland
EEA, US, Canada, Japan, the Republic of Korea, Hong Kong, Singapore, Australia, New Zealand, Switzerland
LTV cap in ACT 80% 125% 80% 80% 80%Maximum asset percentage 92,5% 90,5% 97,0% 79,8% 72,5%Minimum over-collateralisation 8,1% 10,5% 3,1% 25,3% 37,9%House price indexation 100% of price
declines, 85% of price increases
100% of price declines, 85% of price increases
100% of price declines, 90% of price increases
100% of price declines, 85% of price increases
100% of price declines, 100% of price increases
In arrears accounting for the ACT No recognition 30% of current balance
30% of current balance
No recognition 30% of current balance
Maturity structure Hard bullet + pre maturity test (soft bullets possible going forward)
Soft bullet with 12 months extension
Hard bullet + pre maturity test (soft bullets possible going forward)
Soft bullet with 18 months extension
Soft bullet with 12 months extension
In covered bond register Yes No Yes Yes YesUCITS Yes No Yes Yes YesRisk weight 10% 20% 10% 10% 10%
Source: Individual issuers, Crédit Agricole CIB
Credit Focus
22 February 2011 28
Norway – Obligasjoner met fortrinnsrett Issuance structure and overview
Issuance structure Obligasjoner met fortrinnsrett Source: ECBC, Crédit Agricole CIB
Bank Boligkreditt
Equity + Other liabilities
Cover assets
Norwegian Covered Bonds
Issue Investor
Over-collaterali-
sation
Assets incl. shares in Boligkreditt
Liabilities
Bank
If loans are originated by the mother, sale and transfer of cover assets
Legal basis Law on the Financing Business (2002)
Secondary legislation (2007)
Legal framework strengths Transfer of assets has already taken place pre insolvency
Strict stress tests for market- and liquidity-related risks
Separate administrator for the cover pool / covered bonds post insolvency
Administrator can access liquidity post insolvency of the sponsor bank by taking out loans or even issuing new covered bonds
Legal framework weaknesses Broad set of eligible assets + mixed pools are allowed by law
No prescribed over-collateralisation by law
No specific involvement of the supervisory authorities in crisis
No transparency requirements by law
Credit Focus
22 February 2011 29
Overview of legal framework
Product Obligasjoner met fortrinnsrettStructureWhat is the legal basis? Special lawWho is the issuer? Specialised credit institutionWho owns the cover assets? The issuer directlyCover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Residential + commercial)Group originated Senior MBSOther registered assets (ships, aircraft, other moveable assets)
Geographical scope Mortgage assets: domestic Public Sector assets: EEA, OECD
Mixed pools possible? YesLimit on substitute assets 20%ValuationMaximum LTVs Commercial: 60%, Residential: 75%, other (agricultural, ship,
aircraft): 60%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 0%Type of coverage test NPV + stress testsIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk "Natural" matching + stress testing + substitute assets, liquidity
facilitiesSupervision and monitoringWhat is the role of the supervisor? Granting licencesSpecial role of supervisor in crisis regarding covered bonds? NoIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency (of the mother company)?
Cash flows from the pool, sale of cover assets, issuance of bonds / loans
Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association -
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 30
Portugal – Obrigações Hipotecárias (OH) and Obrigações Sobre o Sector Público (OSP) Issuance structure and overview
Issuance structure Portuguese Covered Bonds Source: ECBC, Crédit Agricole CIB
Investor
Substitute assets
Bank
Equity + other liabilities
Other assets
Mortgage cover assets
ObrigaçõesHipotecárias
Issue
Security
Over-collaterali-
sation
Public sector cover assetsOver-
collaterali-sation
Obrigações Sobre o Sector Público
Substitute assets
IssueSecurity
Legal basis Decreto-Lei n.º 59/2006, Primary Legislation
Portuguese Secondary Legislation - Notice number 5/2006
Legal framework strengths Separate administrator for the cover pool / covered bonds post insolvency
Administrator can access liquidity post insolvency
Strong involvement of the Bank of Portugal both pre and also post insolvency
OC levels must be maintained even after stress tests
Legal framework weaknesses Covered bond holders have no claim on the part of the loan above the LTV
limits
If a loan exceeds the LTV limit due to house price declines, it has to be taken out of the cover pool, putting pressure on OC limits if it cannot be substituted by an eligible loan
No transparency requirement by law
Counterparties of liquidity facilities rank subordinate to covered bond investors and derivative counterparties making it more difficult/costly for issuers to find counterparties for this purpose
Credit Focus
22 February 2011 31
Overview of legal framework
Product Obrigações Hipotecárias (OH) + Obrigações Sobre o Sector Público (OSP)
StructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution or specialised credit institutionWho owns the cover assets? The issuer directly
Cover Assets
Eligible cover assets Exposures to public sector entities (OSP)Mortgage loans (Commercial + residential for OH)
Geographical scope Mortgage assets: EEA Public Sector assets: EEA
Mixed pools possible? NoLimit on substitute assets 20%Valuation
Maximum LTVs Commercial: 60%, Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? Yes (Commercial: 60%, Residential: 80%)If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
No, loans have to be removed if limits are breached.
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
No
ALM guidelinesMinimum OC 5.26% for OH, 0% for OSPType of coverage test NPV + stress testIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assets +
liquidity facilitiesSupervision and monitoringWhat is the role of the supervisor? Regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Involved in transfer of cover assets + covered bonds to
another credit institutionIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool Is there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency (of the mother company)? Cash flows from the pool, sale of cover assets, take out loans
Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association GOH Portugal
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 32
Spain – Cedulas Hipotecarias + Territoriales
Issuance structure
Issuance structure Cedulas Hipotecarias Issuance structure Multi Cedulas Hipotecarias
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis Law 2/1981 – on the regulation of the mortgage market, which was updated
by Law 41/2007
Royal Decree 716/2009 – develops certain aspects of Law 2/1981
Law 22/2003 – insolvency law
Law 3/2009 – establishes that mortgage market law supersedes the insolvency law
Legal framework strengths High over-collateralisation levels required by law
Derivatives counterparties are subordinate to covered bond holders (however, this makes it more difficult to find counterparties)
Insolvency administrator has the ability to take out loans and issue new bonds post insolvency of the issuer to generate liquidity
Legal framework weaknesses Weak ALM guidelines (ie, no regulations regarding interest rate and currency
risk hedging)
In case of insolvency of the issuer, there is no separate administrator for the cover pool and the covered bonds
It is unlikely that the administrator will have access to ECB funding after the insolvency of the issuer
Transparency requirements prescribe only annual disclosure
CedulasHipotecarias X
CedulasHipotecarias 1
Liquidity line / reserve fund
Multi CedulasHipotecarias
Bank 1
Equity + other
liabilities
Other assets
Cover assetsCedulas
Hipotecarias
Issue Investor
Bank X
Other assets
Cover assetsSubstitute assets
Bank
Equity + other liabilities
Other assets
Qualifying mortgages Cedulas Hipotecarias
Issue
Investor
Over-collaterali-
sation
Non-qualifying mortgages
Security
Equity + other
liabilities
CedulasHipotecarias
…
Fond de Titulización
Other assets
Issue
Credit Focus
22 February 2011 33
Overview of legal framework
Product Cedulas Hipotecarias Cedulas TerritorialesStructureWhat is the legal basis? Special law Special lawWho is the issuer? Universal credit institution Universal credit institutionWho owns the cover assets? The issuer directly The issuer directlyCover AssetsEligible cover assets Mortgage loans Exposures to public sector
entitiesGeographical scope EU EEALimit on substitute assets 5% 0%Mixed pools possible? No NoValuationMaximum LTVs Commercial: 60%, Residential: 80% not relevantBasis for LTV calculation Mortgage lending value not relevantIs there a LTV cap which makes the entire loan pool ineligible?
No not relevant
If a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes, but it the whole loans will not be considered eligible anymore for the purpose of calculating the legal OC
not relevant
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes not relevant
ALM guidelinesMinimum OC 25% 43%Type of coverage test Nominal NominalIs OC above the minimum protected? Yes YesMitigation of market risk Use of derivatives Not specified in lawMitigation of liquidity risk "Natural" matching + substitute assets Not specified in lawSupervision and monitoringWhat is the role of the supervisor? Covered bond specific checks Covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds?
No No
Is there an independent cover pool monitor? Yes NoSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer?
Preferential claim by law Preferential claim by law
Is there a separate cover pool administrator in addition to the insolvency administrator?
No No
How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assets, issuance of bonds / loans
Cash flows from the pool, sale of cover assets
Recourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditors
Yes, pari passu with senior unsecured creditors
Do derivatives survive the insolvency of the issuer? Yes Not specified in lawHow do derivatives counterparties rank vs. covered bond holders?
Subordinated to covered bond holders Not specified in law
Risk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law?
Yes No
UCITS 22(4) Yes YesCRD Yes YesRisk weight in the RSA 10% 10%Covered bond association - ‐
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 34
Sweden – Säkerställda Obligationer Issuance structure and overview
Issuance structure Swedish Covered Bonds
Source: ECBC, Crédit Agricole CIB
Investor
Bank
Equity + other liabilities
Other assetsOver-
collaterali-sation
Legal basis The Swedish Covered Bond (Issuance) Act 2003:1223
Regulations and general guidelines governing covered bonds, Finansinspek-tionen, 2004
Government Bill – Liquidity matching for covered bonds 2009/10:1032
Legal framework strengths Separate administrator for the cover pool / covered bonds post insolvency
Administrator can access liquidity post insolvency
Involvement of the FSA both pre and also post insolvency
Commercial mortgages limited to 10% of the pool volume
New mortgages cannot be granted in Sweden if their LTV would exceed 85%
Legal framework weaknesses No over-collateralisation required by law, collateralisation has to withstand
stress tests though
Mixed pools possible
No transparency requirement by law
Issue
Cover assets
Swedish Covered Bonds
Substitute assets
Security
Credit Focus
22 February 2011 35
Overview of legal framework
Product Säkerställda ObligationerStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institution with a special licenseWho owns the cover assets? The issuer directly
Cover AssetsEligible cover assets Exposures to public sector entities
Mortgage loans (Commercial mortgages max. 10%)Geographical scope Mortgage assets: domestic, EEA
Public Sector assets: domestic, EEA, OECDMixed pools possible? YesLimit on substitute assets 20% (the Swedish FSA can allow this to be increased to 30%
for a limited period)Valuation
Maximum LTVs Commercial: 60%, Residential: 75%, agricultural: 70%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 0%Type of coverage test NPV + stress testsIs OC above the minimum protected? YesMitigation of market risk Natural matching + use of derivatives + stress testingMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool directly
or via a special administratorIs there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law, specific cover pool administrationIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency (of the mother company)?
Cash flows from the pool, sale of cover assets, take out loans
Recourse to the credit institution's insolvency estate? Yes, pari passu to senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.ascb.se
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 36
United Kingdom – Regulated UK Covered Bonds Issuance structure and overview
Issuance structure UK Covered Bonds
Bank
Equity + other liabilities
Other assets
Cover assets
Source: ECBC, Crédit Agricole CIB
Legal basis Regulated Covered Bond Regulations 2008
Regulated Covered Bonds Specialist Sourcebook 2008
Legal framework strengths Transfer of assets has already taken place pre insolvency
Strong involvement of the FSA both pre and also post insolvency
Separate administrator for the cover pool / covered bonds post insolvency
Currently no transparency requirement by law (although the FSA will impose strict rules going forward, which will provide the best transparency in the market)
Legal framework weaknesses The SPV can rely only on the cash flows generated by the pool and the
ability to sell assets to make coupon and redemption payments
No detailed rules regarding market and liquidity risk in the law
No over-collateralisation required by law
Broad set of eligible cover assets allowed by law
UK Covered Bonds Issue
Over-collaterali-
sation
Guarantee
Cover assets
Investor
Sale through equitable assignment
Liabilities
SPV
Credit Focus
22 February 2011 37
Overview of legal framework
Product UK Regulated Covered BondsStructureWhat is the legal basis? Special lawWho is the issuer? Universal credit institutionWho owns the cover assets? SPE which guarantees the covered bondsCover AssetsEligible cover assets Mortgage loans (Commercial + residential)
Exposures to public sector entities and PPI/PFIsMortgage loans and loans to housing associations without a mortgageGroup originated Senior MBSShip loans
Geographical scope EEA, CH, USA, Canada, Japan, NZ, AUSMixed pools possible? YesLimit on substitute assets Not specified in lawValuationMaximum LTVs Commercial: 60%, Residential: 80%Basis for LTV calculation Market valueIs there a LTV cap which makes the entire loan pool ineligible? NoIf a loan's LTV exceeds the LTV cap, does the part below the limit still remain part of the cover pool?
Yes
Do covered bond holders have a preferential claim on the part of the loan above the LTV cap?
Yes
ALM guidelinesMinimum OC 0%Type of coverage test NominalIs OC above the minimum protected? YesMitigation of market risk Use of derivativesMitigation of liquidity risk "Natural" matching + stress testing + substitute assetsSupervision and monitoringWhat is the role of the supervisor? Granting licences + regular covered bond specific checksSpecial role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool
Involved in transfer of cover assets + covered bonds to another credit institution
Is there an independent cover pool monitor? YesSegregation of assets in an insolvency scenarioAre cover assets ringfenced in an insolvency scenario of the issuer? Preferential claim by law to the assets held by the SPEIs there a separate cover pool administrator in addition to the insolvency administrator?
Yes
How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assetsRecourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditorsDo derivatives survive the insolvency of the issuer? YesHow do derivatives counterparties rank vs. covered bond holders? Pari passu with covered bond holdersRisk weight / regulatory treatment / transparencyCovered-bond-specific disclosures to the public required by law? NoUCITS 22(4) YesCRD YesRisk weight in the RSA 10%Covered bond association www.ukrcbc.com
Source: ECBC, Crédit Agricole CIB
Credit Focus
22 February 2011 38
Comparison of UK regulated covered bond programmes
Abbey National
Barclays Bank Bank of Scotland
HSBC Lloyds TSB Bank
Nationwide BS
Royal Bank of Scotland
Yorkshire BS
Covered Bond Rating
AAA / Aaa / AAA
- / Aaa / AAA AAA / Aaa / AAA
AAA / Aaa / - - / Aaa / AAA AAA / Aaa / AAA
- / Aaa / AAA - / Aa1 / AAA
Programm volume in EUR bn
25 35 60 15 60 35 15 7.5
Eligible assets Residential mortgages up to GBP1.0mn
Residential mortgages up to GBP1.5mn
Residential mortgages up to GBP1.0mn
Residential mortgages up to GBP1.0mn
Residential mortgages up to GBP1.0mn
Residential mortgages up to GBP1.0mn
Residential mortgages up to GBP2.6mn
Residential mortgages up to GBP1.0mn
Geographical focus England, Wales, Northern Ireland, Scotland
England, Wales, Northern Ireland, Scotland
England, Wales, Scotland
England, Wales, Northern Ireland, Scotland
England, Wales, Scotland
England, Wales, Northern Ireland, Scotland
England, Wales, Scotland
England, Wales, Northern Ireland, Scotland
LTV cap 75% 75% 60% 75% 75% 75% 75% 75%House price index Halifax Halifax Halifax Halifax Halifax Nationwide Halifax HalifaxMaximum asset percentage
91.0% 94.0% 92,5% 92,5% 92,5% 93.0% 90.0% 93.5%
Minimum over-collateralisation
109.9% 106.4% 108.1% 108.1% 108.1% 107.5% 111.1% 107.0%
Current asset percentage
82.0% 77.3% 78.0% 78.2% 79.9% 84.5% 79.0% 78.0%
Current minimum over-collateralisation
122.0% 129.4% 128.2% 127.9% 125.2% 118.3% 126.6% 128.2%
In arrears accounting
Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.
Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.
No recognition Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.
Full recognition if in arrears < 3 months, otherwise 70%
Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.
Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.
Max. 40% if LTV < 75%, max. 25% if LTV > 75%, or repurch.
Maturity structure 12 months soft bullet
Hard bullet + pre maturity test
Hard bullet + pre maturity test
Hard bullet + pre maturity test
12 months soft bullet
12 months soft bullet
Hard bullet + pre maturity test
12 months soft bullet
Source: Bloomberg, Individual issuers, Crédit Agricole CIB
Credit Focus
22 February 2011 39
Credit Research contact details Jean-François Paren Global Head of Credit Research / Telecom Analyst +33 1 41 89 33 95 Franck Bataille Utilities Analyst +33 1 41 89 14 86 Gwenaëlle Lereste Financials Analyst +33 1 41 89 06 90 Christophe Boulanger Autos Analyst +49 69 78 901 760 Harpreet Parhar CFA Credit Strategist +44 20 7214 5534 Caroline Brugère Industrials Analyst +33 1 41 89 88 38 Claire Poncet Dumont Retail Analyst +33 1 41 89 94 76 Axel de Chaurand Strategy Data Manager +33 1 41 89 04 65 Eric Sharper Industrials Analyst +44 20 7214 6546 Florian Eichert CFA Covered Bond Analyst +44 20 7214 6402 Guillaume Thomas Quantitative Analyst +33 1 57 87 02 80 Elisabeth Van Sante Financials Analyst +44 20 7214 6538
Certification The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Florian Eichert Disclosures Company Disclosure Bank of Scotland None
A NOT IN USE B NOT IN USE C The Company owned more than 5% of the total issued share capital of Crédit Agricole SA as of the end of the
second most recent month preceding the publication date of this report. D NOT IN USE E One or more companies in the Crédit Agricole S.A. group owned more than 3 % of the total issued share
capital of the Company as of the end of the second most recent trading day preceding the publication date of this report.
F Crédit Agricole Cheuvreux and/or a company in the Crédit Agricole S.A. group is a market maker or a liquidity provider for the financial instruments of the Company.
G Crédit Agricole Corporate and Investment Bank (CIB) and/or a company of the Crédit Agricole S.A. group has been lead or co-lead manager over the previous 12 months in a publicly disclosed offer of or on financial instruments of the Company.
H Crédit Agricole CIB and/or a company in the Crédit Agricole S.A. group has concluded or is party to a non confidential agreement relating to the provision of investment banking services (except publicly disclosed offers mentioned under G) to the Company during the past 12 months or that has given rise during the same period to the payment of compensation or to the promise to get a compensation paid.
I This research has been communicated to the Company and following this communication, its conclusion has been amended before its dissemination.
J An executive director of the Credit Agricole S.A. group is a director or board member of the company. Performance of credit instruments: We express our expectation of how the 5Y CDS is going to perform vis-à-vis its sector. The timeframe of that recommendation is one month. When the analyst changes a recommendation he/she should indicate in the analysis when the last recommendation was made. Outperform: CDS spreads should outperform the sector performance. Sectorperform: CDS spreads should perform in line with the sector performance. Underperform: CDS spreads should underperform the sector performance.
Recommendation System: Fundamental credit assessment: We evaluate the fundamental credit quality trend of an issuer for the next 12 months. Crédit Agricole CIB’s Credit Research evaluates the potential changes of an issuer for the next 12 months and assigns a one year forward rating based on S&P’s scale. This rating is to be compared with the average long-term rating assigned by S&P and Moody’s. Internal credit rating: We assign a rating to a company which reflects the assessment of the credit quality by the credit analyst. The timeframe for the rating is one year. As a rating scale we use a scale similar to the one of S&P and Fitch, however, we substitute the rating agencies plus or minus by high and low, ie. the Crédit Agricole CIB scale uses AAA, High-AA, Mid-AA, Low-AA, High-A, Mid-A etc.
Credit products rating distribution table: (as at 19 January 2011)
All covered companies Companies where Crédit Agricole CIB provided Investment Banking Services in past 12 months
Count Percent Count Percent Outperform 15 15% 5 33% Sectorperform 61 61% 23 38% Underperform 24 24% 5 21%
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