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440页J.P.摩根全球债券手册2019-2020版-2019.9.6.pdf
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Product Overview
Covered bonds: a ‘bluffer’s guide’
We set out below a cheat-sheet for readers new to the asset class, providing a
synopsis of the main characteristics of the product.
Table 1: Covered bond cheat-sheet
What is a covered bond? Covered bonds are secured, senior, bullet instruments of an issuer (typically a bank), that provide investors
with recourse to both the issuing institution and the underlying revolving collateral pool.
What types of CB structures exist? There are three broad CB structures: a) CB can be issued directly off the balance sheet of the originator, with
the collateral pool remaining with the originator, albeit ring-fenced for covered bond investors (for example, in
Austria and Germany); b) a financial institution establishes a limited function subsidiary, which in turn issues
covered bonds (for example, France’s OF, Norway, Ireland etc); c) in structured CB jurisdictions, CBs are
typically unsecured obligations of the issuer, with funds raised from the issuance of CB lent to a guarantor
vehicle (typically a limited liability SPV), which uses the loaned amounts to acquire collateral from the
originator. This collateralised entity then acts as guarantor to the unsecured bonds, agreeing to repay
bondholders on insolvency of the issuer (for example UK, Canada, Netherlands, Italy).
What type of collateral is accepted? CB legislation (or transaction docs, when no CB legislation exists) typically define the list of collateral eligible
to be included in the cover pool. The main types of assets used as primary collateral are public sector
exposures and residential & commercial mortgages. Shipping, aircraft and SME exposures are also able to
be included in some jurisdictions. In some cases, a max LTV is specified. The EC’s CRR also allows senior
MBS (both residential and commercial) issued by securitisation entities, where at least 90% of the underlying
mortgages comply with the above rules for unsecured mortgage exposures (essentially when securitisation is
used for intra-group asset transfer). The MBS must be rated Credit Quality Step 1 (AAA to AA-) and can only
form 10% of the collateral pool (self-originated MBS receive a waiver from the 10% cap). Substitute assets
up to a given threshold (typically 10-15%) can also be included in cover pools, and typically include public
sector or bank exposures (and cash).
What type of risk are investors exposed to? Investors are generally exposed to issuer risk until its default, after which they are exposed to the credit risk
of the cover pool. If there are CBs outstanding after the cover pool has been extinguished, CB investors will
have a residual claim to the bankruptcy estate of the issuer which will rank pari passu with that of senior
unsecured bondholders
Do cover bonds accelerate upon the issuer’s default? No, CBs do not necessarily accelerate on insolvency of the issuing institution. Only the failure of the
programme to make payments as and when due typically results in the acceleration of the obligations.
Which jurisdictions are the largest markets? The largest market, by outstanding amount, is Denmark, followed by Germany, France and Spain. As CBs
gain popularity with regulators, issuers and investors, more jurisdictions are starting to push for dedicated
covered bond legislation. Singapore launched its inaugural benchmark covered bond in July 2015, while
Turkey and Poland debuted in April 2016 and October 2016, respectively. Most recently, the inaugural
benchmark covered bond from Japan was issued in October 2018, followed by Slovakia in March 2019.
How do CBs differ from RMBS? The main differences between RMBS and covered bonds can be summarised as:
a) amortisation: RMBS generally have a pass-through structure based on the repayment of the underlying
collateral, while CBs generally have a hard (or soft) bullet profile–although ‘hybrid’ instruments, known as
Conditional pass-through (CPT) bonds have become increasingly popular; b) credit enhancement: covered
bonds have much simpler structures than ABS and rely on over-collateralisation as the predominant form of
credit enhancement. This can vary according to the usage of the programme by the issuer but a minimum
OC has to be maintained; this is monitored through asset and interest coverage tests typically monitored by
third parties, which ensure that the asset pool and its proceeds are enough to match the issuer’s CB
liabilities. In senior RMBS, credit enhancement is given by both subordination and structural features and,
except for certain structures, it generally increases as the deal de-levers; c) unlike securitisation, where
investors benefit from recourse to the collateral pool only, CB investors benefit from dual recourse to both
the issuer and the cover pool.Europe Credit Research
06 September 2019
Meghan C Kelleher
(44-20) 7134-2591
meghan.c.kelleher@jpmorgan.com
Suraj Dey, CFA
(44-20) 7134-1722
suraj.dey@jpmorgan.com
Below, we set out to define the core characteristics of the covered bond product,
despite recognising that by making some generic statements, we ignore some of the
multiple nuances that issuance from a number of issuers and jurisdictions necessarily
implies. We update this segment to reflect changes to legislative frameworks and the
rating methodologies of the main agencies.
For more detail on individual jurisdictions, please see the respective country sections
towards the back of this publication.
What exactly is a covered bond?
In a sentence…
Covered bonds are secured, senior, bullet instruments of an issuer (typically a bank),
that provide investors with recourse to both the issuing institution and the underlying,
revolving collateral pool.
Structural form
Covered bonds are typically thought of as bonds issued from the balance sheet of an
originating bank, with the revolving collateral pool remaining with the originator,
albeit ring-fenced for covered bond investors in case of institutional insolvency. This
model is deployed in a number of significant issuing jurisdictions (for example,
Austria, Finland, Germany, Greece, Portugal, Spain and Sweden); however, there are
also two other forms of covered bond structures common in a number of
jurisdictions.
Figure 1: Forms of covered bonds
Source: J.P. Morgan International ABS & CB Research
Secured debt with dual recourse to
both the issuer and the collateral
pool…
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