30 years: Capital markets & covered bonds
There are several different ways to structure covered bonds. In this video, Richard covers the main structures, their implications and why they might be the best option in any given country.
There are several different ways to structure covered bonds. In this video, Richard covers the main structures, their implications and why they might be the best option in any given country.
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6 mins 38 secs
There are 4 key structures of covered bonds. All of the models outlined below achieve similar rating uplifts, legally robust segregation, management of assets in insolvency and produce bonds that investors are equally happy to buy – which is used depending on the local legal environment amongst other variables.
Key learning objectives:
Identify and define the key structures of covered bonds
Describe how they work
Outline the key considerations and implications of each model
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The assets that back the bond are simply entered into a register that is maintained until it is needed (the failure or resolution of the issuer). The register forms the basis of a separate legal pool that can be segregated and used to service the bonds.
A separate company is set up. It buys the assets from the bank and uses them as the basis for a guarantee. If the bank fails, the separate company becomes the primary source of repayment of the bonds.
Benefits
Considerations
This is an independent bank, owned by a regular bank that exists purely to manage the assets that are funded by covered bonds. This can achieve a much higher degree of legal and operational independence.
Disadvantages
This involves an agency which issues bonds and then uses the proceeds to on-lend to smaller banks who use the cover pool assets as security for the loan. This is used extensively in Switzerland and France.
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