6904327 goldman sachs 4a covered bonds 01 march 11 eldar
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Covered Bond
March, 2011
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Table of Contents
I. Covered Bond Overview
II.
Covered Bond Jurisdictional/Legal Frameworks
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I. Covered Bond Overview
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Covered Bond OverviewBackground
Covered bonds are a direct obligation of the issuing entity (usually a financial institution) held on balance sheet; ineffect, these are collateralized obligations of the issuer which place covered bondholders in a more seniorposition than senior unsecured creditors
Specific legislative frameworks or contractual agreements define the rules on management of cover asset poolssuch as minimum overcollateralisation and max LTV for mortgages
Issuers need to adhere to these requirements at all times which, in effect, protects covered bond creditors
There have been no covered bond defaults in the 240 year history of the product
Rating methodologies have evolved to incorporate broader risk factors but a key factor is that, in the event of abank default, the covered bonds would not be expected to follow the supporting bank into insolvency
Until early 2008, covered bonds historically traded as a swaps proxy within the interest rate space
Investors viewed the credit risk in covered bonds as negligible with minimal differentiation between issuingentities, jurisdictions and collateral types
In 2008 covered bonds started to trade as a credit product rather than an instrument in the interest rate space
The investor base was reduced significantly, with central banks almost completely abandoning the market,although we have recently seen some of the larger participants return to the sector
Large differentials emerged between jurisdictions (legislative versus contractual covered bonds), collateraltypes and issuing entities
Trading levels started to be based on discounted senior unsecured pricing, rather than pure collateral valuation
Today, the premium paid by fixed income investors for covered bonds varies by jurisdiction and collateral
type
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Covered Bond OverviewKey Risks
Cover pool risk
Characteristics of eligible assets
Static analysis: residential mortgages, commercial mortgages and public sector pools
Impact of dynamic pools on creditworthiness
Issuer risk
Credit quality of the ultimate parent and covered bond issuing entity
Correlation between credit quality of issuer and that of collateral pool
Evaluating the issuers business organization: origination practices, client base and IT systems
Implications of covered bond issuance on bank rating operational risk
Scope/independence of asset monitors role and relevance to performance
Liquidity risk
Implementation of the new liquidity standards may have a significant impact on AAA markets.
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Covered Bond Overview
Comparison with MBS
An issuer is legally and/or contractually required to maintain the quality and size (including over-collateralisation) ofa cover pool even if the quality of the overall loan book deteriorates
Issuer must continuously replace maturing and/or non-performing collateral with performing collateral; this
process is monitored by trustees who in turn are accountable to financial regulatory authorities
General differences between standard covered bonds and standard MBS include the following:
Covered Bonds Mortgage-backed Securities
Debt type In most cases direct bank debt Debt issued by Special Purpose Corporations
On/off balance sheet On balance sheet of originator Off balance sheet of originator
Cover assets Covered bond issuance off one program so all rank pari Each MBS transaction backed by separate pool of assets
Tranches No tranching of covered bonds Senior and subordinated tranches
Asset pool dynamics Dynamic revolving pool of qualifying collateral Usually static pool of assets
Substitution Non-performing loans normally substituted by originator No substitution of non-performing loans
Cashflow transformation Yes, as part of the cover asset pool management Generally pass-through of cashflows
Recourse to originator Full recourse to originator for covered bondholders No recourse to originator
Originator default In case of originator default segregation of cover assets MBS normally not affected by originator default
Bondholder protection Preferential claim on cover assets, senior to other creditors Exclusive claim on cover assets
Claim on other assets Pari passu with senior note holders on non-cover assets No claim on originator assets outside the MBS pool
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Covered Bond Market Outlook
Record volumes of benchmark issuance expected in 2011
Benchmark Issuance (bn equiv.) Benchmark Redemptions (bn equiv.)
5
15 14
49
125120
97 97
130135
154
191
171
96
122
201
95
[215]
0bn
40bn
80bn
120bn
160bn
200bn
240bn
-95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11-11E
EUR USD GBP
We expect 2011to be arecord year of CB
benchmark issuance(215bn GS estimate) partlydriven by Basel 3 liquidityand funding regime
implementations as wel l asremainingly significantSenio r/Covered fundingcos t d ifferentials
168
119
109
154
134142
108
85
3831 31
34
17
83
14
4 4
0bn
40bn
80bn
120bn
160bn
200bn
240bn
-10 -11 -12 -13 -14 -15 -16 -17 -18 -19 -20 -21 -22 -23 -24 -25 -26 -27
EUR
USD
GBP
40
60
80
100
120
140
Sep-10 Oct-10 Dec-10 Jan-11
Differential(bps)
Germany France Nordic Benelux
Senior/Covered funding cost differential remains significant
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Covered Bond Market Developments
Strong start in 2011 combined with net supply from Germany
Benchmark Issuance (bn equiv.) Benchmark Redemptions (bn equiv.)
Monthly Benchmark Issuance (bn equiv.)
Source: GS Analysis
64
44
34
4960 56
2432 33
42
18
311
35
50
27
68
4953
31
96
0
10
20
30
40
50
60
70
80
90
100
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Germany Spain France UK Sweden Italy Other
39 38
2518
36
24 2128
71
2529 29
47
30 28 29
42 40
24
36
0
10
20
30
40
50
60
70
80
90
100
Q111
Q211
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
Q214
Q314
Q414
Q115
Q215
Q315
Q415
Germany Spain France UK Sweden Italy Other
19
10
4
15
20
67
5 53
0
42
52
17 16
19
3
28
1214
1
31
12
25
17
2
30
1310
30
21
9
1
49
28
20
0bn
5bn
10bn
15bn
20bn
25bn30bn
35bn
40bn
45bn
50bn
January February March April May June July August September October November December
2008 2009 2010 2011
2011 hasstarted offwith recordhigh issuancevolumes inJanuary andFebruary
January 2011was a recordmonth with
49bn
benchmarkissuance
Net negativeGermansupply of2011 is
expected tobe picked-up byFrench,Nordic andBeneluxissuers
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Covered Bond Market Developments
French sitting in the front seat in the beginning of 2011 driving tenors longer out on the curve
Benchmark Issuance by Maturity (bn equiv.) Benchmark Issuance by Jurisdiction (bn equiv.)
515 14
49
125120
97 97
130135
154
191
171
96
122
201
96
0
50
100
150
200
250
300
-95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11
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The Evolution of the Covered Bond Product
Resilience of covered bonds during the crisis
Number of inaugural Issuances Covered bond versus MBS issuance
1
3
1 1 1 11
3
1
1 1
3 3
3
1
9
45
6
23
12
3 1
32
23
2
1
1
3
3
1
3
3
3
2
2
2 2
4
2
2
2
5
1
2
6
4
6
4
1
3
3
2
3
2 2
1
9
5 5
6
8
6
4
3
10
7
8
15
12
18 18 18
0
4
8
12
16
20
-94 -95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10
Benelux
France
Germany & AustriaItaly
Nordic
Other
Spain & Portugal
UK & Ireland
6170
110 113
183
286
225
22
7
55
97 97
130135
154
191
171
96
122
191
0
50
100
150
200
250
300
-01 -02 -03 -04 -05 -06 -07 -08 -09 -10
bn
MBS
Covered Bonds
The number ofnew coveredbond issuerscoming to themarket hasincreasedduring andafter the crisis
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Covered Bond Investor Demand Dynamics
Who invests in CBs from which region?
Some CB issuers access a more diversified investor base and are less reliant on domestic investors as peers
Bank treasuries are driving Benelux and German issues while insurance is supporting French issues
Source: GS Analysis. European covered bond issues 2011YTD with available distribution splits (includes 60 deals)
76%
36%
31%
51%
21%
26%
49%
6%
34%
10%
12%
17%
19%
8%
5%
5%
37%
5%
16%
15%
7%
5%
3%
13%
1%
4%
5%
23% 3%
25%
8%
12%
9%
8%
5%
16%
3%
4%
3%
4%
4%
4%
5%
5%
7%
6%
6%
9%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Germany & Austria
France
UK & Ireland
Benelux
Iberia
Italy
Nordic
Germany & Austria France UK & Ireland Benelux Iberia Italy CEE Nordic Asia OthersInvestor Region:
62%
34%
22%
59%
31%
23%
47%
20%
30%
48%
25%
45%
56%
30%
10%
13%
10%
6%
11%
1%
14%
5%
20%
16%
8%
13%
14%
7%
3%
3%
5%
2%
1%
6%
3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Germany & Austria
France
UK & Ireland
Benelux
Iberia
Italy
Nordic
Banks AM/Funds CB/SWF's Insurance Others
Investor Type:
IssuerReg
ion:
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Covered Bond Investor Demand Dynamics
Who invests in CBs with which maturities?
While German investors drive the shorter tenor deals, French and UK accounts support the longer maturities
Bank treasuries buy shorter tenors, Central banks up to 5yrs and Insurance in 10yrs
Source: GS Analysis. European covered bond issues 2011YTD with available distribution splits (includes 60 deals)
46%
44%
43%
39%
12%
12%
11%
27%
7%
10%
7%
17%
3%
5%
10%
3%
7%
4%
1%
4%
4%
8%
4%
2%
1%
10%
10%
10%
5%
5%
4%
2%
1%
5%
8%
7%
4%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
x < 5yrs
5yrs x < 7yrs
7yrs x < 10yrs
10yrs x
Germany & Austria France UK & Ireland Benelux Iberia Italy CEE Nordic Asia OthersInvestor Region:
IssueMaturity:
51%
43%
39%
30%
30%
34%
38%
37%
12%
13%
7%
7%
4%
7%
11%
24%
3%
3%
5%
3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
x < 5yrs
5yrs x < 7yrs
7yrs x < 10yrs
10yrs x
Banks AM/Funds CB/SWF's Insurance OthersInvestor Type:
IssueMaturi
ty:
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II. Covered Bond Jurisdictional/Legal Frameworks
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Covered Bond Jurisdictional/Legal FrameworksOverview
Covered bonds are long-established products in many EU jurisdictions, with well-developed legal frameworks.
No defaults have occurred so these frameworks have not been tested in court.
EU jurisdictions covered in this presentation have legal frameworks based on legislation, Canadian issuance isbased on contractual arrangements.
Approach to segregation differs by country as summarized below:
France, Italy, Netherlands, UK and Canada achieve segregation upon issuance by transfer to a separateentity.
In Austria, Denmark, Finland, Germany, Ireland, Norway, Portugal and Sweden assets are held on balancesheet but separately identified. Segregation is automatic on insolvency of the issuer.
In Spain, noteholders are given a priority claim by a form of legal mortgage over the issuers holdings of realestate.
Most jurisdictions require a third party to monitor the covered assets and to report to the local regulator on aperiodic basis, with the following exceptions:
Austria and Germany only permit changes to the cover pool with the prior consent of the independent monitor.
The issuer performs the monitoring role (with reporting to their regulator) in Denmark, Finland, Spain and theUK.
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Important Notice
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This document is a product of the Goldman Sachs Financing Group and is not research. We have prepared thisdocument based upon information that we believe to be reliable but we make no representation or warranty, expressor implied that it is accurate, complete or up to date and accept no liability, other than for fraudulent misrepresentation,if it is not. Any proposed terms in this document are indicative only and remain subject to contract. Nothing in thisdocument shall constitute or form part of any legal agreement, or any offer to sell or the solicitation of any offer to buyany securities. Goldman Sachs does not provide legal, accounting or tax advice and you are strongly advised toconsult your own independent advisors on any legal, tax or accounting issues relating to these materials. We and our
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