European Union: UK Regulated Covered Bond Regulations 2008 - Comparative Description of Regulated Covered Bond Frameworks in Main EU Jurisdictions - Part 4 of 4

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Keywords: FSA, covered bonds, debt securities, asset pool, UCITs Directive, Capital Requirements Directive, SPV model

Originally published March 2008

4.1. UK And Germany

UK

GERMANY

Eligible Covered Bonds Regulation Under UCITs Directive And CRD?

− UCIT-compliant "Regulated Covered Bond Regulations 2008"came into force on 6 March 2008.

− Yes. Pfandbriefe is UCITs Directive compliant.

Pfandbriefe is also CRD compliant. However, the range of eligible assets in the cover pool is narrower under German law (note below under cover pool of assets that it does not include mortage-backed or asset-backed securities).

Issuer

− Credit institution with registered office in the UK and authorised as deposit-taking institutions under FSMA.

− Issuer must be registered with the FSA as Regulated Covered Bond issuer

− Credit institution with registered office in Germany (Pfandbriefbank)

− Issuer must be licensed by the BaFin for the business of issuing Pfandbriefe (Pfandbriefgeschäft)

Cover Pool Of Assets

Assets may be located in UK, in a EEA State, Switzerland, US, Canada, Japan; Australia, New Zealand, Channel Islands or the Isle of Man.

Eligible assets will be those listed in Annex VI, Part 1, Paragraphs 68-70 of the CRD, with certain restrictions provided for in the "Regulated Covered Bond Regulations 2008"�:

− Exposures to or guaranteed by central governments, central banks, public sector entities, regional governments and local authorities in the EU.

− Exposures to or guaranteed by non-EU central governments, non-EU central banks, multilateral development banks, international organisations, and exposures to or guaranteed by non-EU public sector entities that qualify for "credit quality step 1" (meaning AAA-rated), and exposures to or guaranteed by non-EU public sector entities, non-EU regional governments and non-EU local authorities that are risk weighted as exposures to institutions or central governments and central banks according to the CRD and that qualify for "credit quality step 1" (meaning AAA-rated).

− Exposures to "credit quality step 1" (meaning AAA-rated) firms. The total exposure of this kind shall not exceed 15% of the nominal amount of the issuer's outstanding Covered Bonds.

− Loans secured by residential real estate up to the lesser of the principal amount of the liens that are combined with any prior liens and 80% of the value of the mortgaged properties.

− Loans secured by commercial real estate up to the lesser of the principal amount of the liens that are combined with any prior liens and 60% of the value of the pledged properties.

− Senior units issued by French Fonds Communs de Créances or by equivalent securitisation entities governed by the laws of the UK or an EEA state, securitising residential or commercial real estate exposures provided that such exposures were originated or acquired by the Covered Bond issuer or a connected person and the senior units are rated by an agency with the highest credit rating.

− Loans secured by ships, up to a maximum LTV of 60%.

− Loans to a registered social landlord secured over housing accommodation or by rental income from housing accommodation.

− Loans to a project company of a project which is a public-private partnership project secured by payments made by a public body with step-in rights.

Assets may be located in Germany, EU, EEA, USA, Canada, Japan or Switzerland.

Types of eligible assets are as follows:

− Exposures to public institutions, including against OECD-member states (öffentliche Pfandbriefe).

− Residential and commercial mortgage loans with maximum LTV of 60%. There is a special rule on mortgages over real estate in construction and mortgages over new buildings, by virtue of which the aggregated amount of both types of loans must not exceed 10% of the cover pool amount (Deckungswerte) and two times the liable equity capital (haftendes Eigenkapital), while mortgages over real estate in construction must not exceed 1% of the cover pool amount (Deckungswerte).

− Ship mortgages (Schiffshypotheken).

Covered Bond Structures

Structured Covered Bonds (with SPV) – the SPV model:

− issuer issues Covered Bonds and lends the issue proceeds to an SPV (an LLP or UK company);

− the SPV uses loan to acquire a beneficial interest in a pool of mortgage loans (and accompanying security) made by issuer;

− as guarantee of repayment of Covered Bonds, the SPV provides a covered bond guarantee and grants security over its assets to secure its obligations under the covered bond guarantee.

Integrated model: The issuer holds the cover pool on its balance sheet. All obligations relating to the Pfandbriefe are obligations of the issuer as a whole. Upon insolvency of the issuer, the cover pool will be segregated (see below).

Structured Covered Bonds (the SPV model): not regulated by law. However there are some initial efforts to develop structured covered bonds programs for saving banks (Sparkassen).

Over Collateralisation

− The cover pool must be, during the life of the Covered Bonds, capable of covering claims attaching to the Covered Bonds and sums required for the maintenance, administration and winding up of the pool.

− The FSA will set out more detailed requirements to meet, maintain and monitor over collateralisation.

− The cover pool must be, during the life of the respective cover pool (Pfandbriefgattung), capable of covering claims attaching to the Pfandbriefe.

− Additional mandatory over-collateralisation of 2% of cover pool calculated over the assets' net present value (NPV) to cover servicing costs and credit and liquidity risks of the cover pool in an insolvency event of issuer.

Special Protection For Covered Bondholders Upon Insolvency Of Issuer

Upon the issuer becoming insolvent, the SPV will acquire the legal title to the cover pool and attached security.

According to the "Regulated Covered Bond Regulations 2008", where the SPV is wound up, the claims of the following parties shall have priority to all other creditors: (i) covered bondholders; (ii) "persons providing services for the benefit of those bondholders"; (iii) "counter-parties to hedging instruments which are incidental to the maintenance and administration of the asset pool or to the terms of the covered bonds"; (iv) persons (other than the issuer) providing a loan to the SPV to enable it to satisfy the claims of persons mentioned in (i) to (iii) above.

The claims of persons in (ii) to (iv) above may rank equally with, but not in priority to, the claims of the covered bondholders.

Upon insolvency of the issuer, the cover pool will be segregated from the general bankruptcy estate, and will be maintained separately by a cover pool administrator (Sachwalter). The cover pool will be reserved for the claims of the Pfandbriefe holders and, even then, they will also have a claim against the general insolvency estate of the issuer.

The Sachwalter is a qualified individual, who will be appointed by the Court, on proposal by the BaFin, and empowered with full administrative powers.

The Sachwalter may even be appointed before insolvency proceedings are commenced.

The Sachwalter has to ensure that liquidity of the cover pool is preserved.

Subject to approval by the BaFin, the Sachwalter may exercise following rights:

− take over the full pool management until all outstanding Pfandbriefe have been repaid;

− outsource the cover pool management to another mortgage bank; or

− transfer the pool to a mortgage bank.

Covered Bond Structures

Structured Covered Bonds (with SPV) – the SPV model:

− issuer issues Covered Bonds and lends the issue proceeds to an SPV (an LLP or UK company);

− the SPV uses loan to acquire a beneficial interest in a pool of mortgage loans (and accompanying security) made by issuer;

− as guarantee of repayment of Covered Bonds, the SPV provides a covered bond guarantee and grants security over its assets to secure its obligations under the covered bond guarantee.

Integrated model: The issuer holds the cover pool on its balance sheet. All obligations relating to the Pfandbriefe are obligations of the issuer as a whole. Upon insolvency of the issuer, the cover pool will be segregated (see below).

Structured Covered Bonds (the SPV model): not regulated by law. However there are some initial efforts to develop structured covered bonds programs for saving banks (Sparkassen).

Public Supervision

The FSA is competent authority.

The FSA will maintain a Register of "Regulated Covered Bond Issuers" and a Register of "Regulated Covered Bonds". The Issuer and the SPV must comply certain mandatory on-going notifications to the FSA, including confirmation that over-collateralisation continues to be met. An independent auditor shall check on an annual basis if the pool continues to comply with the coverage test.

The BaFin is competent authority.

A certified auditor will be appointed by the BaFin to act as cover pool monitor (Treuhänder). The monitor has to ensure that the prescribed over-collateralisation is maintained at all times and that the cover assets are recorded in the cover register. Without his approval, no assets may be removed from the cover pool.

In addition, BaFin has to monitor the cover pool every two years, for which they may appoint special auditors.

4.2. Spain, France And Italy

SPAIN

FRANCE

ITALY

Eligible Covered Bond Regulation Under UCITs Directive And CRD?

− Yes. Cédulas Hipotecarias ("CHs") and Cédulas Territoriales ("CTs") (jointly "Cédulas") are UCITs Directive and CRD compliant. Note, however, that the CRD has not yet been fully implemented in Spain.

− Cédulas are also eligible for repo transactions with the Bank of Spain and the ECB.

− Yes, Obligations Foncières are UCITs Directive and CRD compliant.

− BNP Paribas and Groupe Banque Populaires are covered bond issuers governed by special legislation.

Obligazioni Bancarie Garantite (hereinafter "OBGs") are both UCITs Directive and CRD compliant. They are also eligible for repo transactions with the Bank of Italy and the ECB.

− Covered bonds issued by the Cassa de Depositi e Prestiti ("CPD") are not UCITs Directive compliant. However, they are eligible for repo transactions with the Bank of Italy. These Covered Bonds are not described in this chart.

Issuer

− Banks, savings banks and the Confederacy of Spanish Savings Banks (CECA).

− Other financial institutions such as cooperativas de crédito and establecimientos financieros de crédito.

Societes de Credit Foncier ("SCF").

− SCFs are credit institutions (établissements de crédit) governed by Articles L. 515-13 to L. 515-515-33 of the French Monetary and Financial Code.

− SCFs only purpose is to acquire and grant eligible guaranteed loans and loans to public entities in order to finance the issuance of privileged Obligations Foncières.

− SCFs may issue other types of debt securities, but only Obligations Foncières will benefit from the "priority privilege" upon insolvency of the SCF (see below).

− Credit institutions complying with the following requirements:

o a consolidated regulatory capital of no less than EUR 500 million;


o a regulatory capital ratio not lower than 9%.


− The above requisites need to be fulfilled also by the transferring credit institution (i.e. cover pool providers), should this be different from the issuer (see Covered Bond structures below).

Cover Pool Of Assets

The cover pool of assets for CHs may be comprised of the following assets:

− Loans secured by a first ranking mortgage over the whole property. Maximum LTV is 60% of the valuation price given to the property by a Sociedad de Tasación. Maximum LTV is 80% for mortgage loans destined to construction, purchase or rehabilitation of residential property and 95% if the mortgage loans benefit from additional security. Real estate securing the loan may be located in Spain or in another EU Member State;

− Replacement assets which may be:

o fixed income securities issued by the Spanish Central Government, by other EU Central Governments or by the Instituto de Crédito Oficial;


o CHs and mortgage bonds listed in an official secondary market, provided that their cover pools do not include any loans granted by the issuer of the CH or any firms within its group;


o securities issued by Fondos de Titulización Hipotecaria or Fondos de Titulización de Activos (Spanish-law governed securitisation SPVs), provided that they are listed in an official secondary market and they are not secured by any loan granted by the issuer of the CH or by any firms within its group;


o other fixed income securities listed in an official secondary market, provided that they have a rating equal to the Kingdom of Spain's rating and they were not issued by the issuer of the CHs or by any firms within its group.


The cover pool of assets for CTs may be comprised of:

− Loans granted to or secured by the Spanish Central Government, the Autonomous Communities, the Municipalities and public institutions and publicly owned companies.

− Loans granted to or secured by similar public institutions in EEA Member States.

SCFs may only hold Covered Bond eligible assets in their balance sheets. All assets on the balance sheet are part of the cover pool.

Eligible assets are:

− Loans:

o loans secured by a first ranking mortgage or equivalent security;


o loans granted to finance real estate and guaranteed by a credit institution or an insurance company that does not belong to the group of the relevant SCF, subject to LTV limitations (LTV is of maximum amounts of 60% (for mortgaged loans), 80% (in the case of residential real estate) and 100% (in the case of (in the case of social residential real estate) of the total value of the mortgaged or financed real estate asset). The total amount of these loans cannot exceed 35% of the total assets of the SCF. Real estate assets may be located in France, any EU or EEA country and other countries, subject to specific criteria.


− Exposures (i.e, debt instruments, debts in cash, or debts arising from financial lease agreements) to or totally guaranteed by:

o central administrations, central banks, public local entities and their groups belonging to a member state of the EU or the EEA or central administrations and central banks belonging to a non member state of the EU or of the EEA (in the latter case, such public entities must benefit from the higher degree of credit quality, as such quality is rated by a credit rating agency recognized by the Commission bancaire);


o EU, IMF, BIS and multilateral development banks registered with the French Ministry of Finance; and

o other public sector entities and multilateral development banks (benefiting from the higher degree of credit quality, as such quality is rated by a credit rating agency recognized by the Commission bancaire).

− FCC (French Law-governed securitisation SPVs) units or securities issued by similar securitisation entities subject to the laws of an EU or EEA Member State, provided that:

o the assets of such FCC or similar entity are composed of no less than 90% of eligible assets; and

o such senior FCC units benefit from the higher degree of credit quality, as such quality is rated by a credit rating agency recognized by the Commission bancaire).

− Replacement assets, which are limited to 15% of the amount of outstanding Obligations Foncières issued by the SCF, are defined as sufficiently secure and liquid assets (this includes debts over credit institutions and/or investment companies).

The eligible assets as coverage for OBGs are the following:

− Residential mortgage loans with a maximum LTV of 80% or commercial mortgage loans with a maximum LTV of 60%.

− Claims owed by (or guaranteed by) the following entities, up to 10% of the cover pool:

o public entities of EEA member countries and Switzerland, with a max risk weight of 20%;

o central governments entities of non-EEA member countries with a risk weight of 0%; and

o other public entities of non-EEA member countries with a risk weight of 20%.

− Securitisation notes backed (for a minimum of 95%) by the claims described above with a maximum risk weight of 20%.

The Bank of Italy sets further requirements to the amount of assets that a credit institution may transfer to an SPV (see Covered Bond Structures below) as cover pools for OBGs on the basis of the credit institution's consolidated regulatory capital ("CRC"):

− Credit institutions with a CRC ratio of 11% and a Tier 1 capital ratio of at least 7% are subject to no limits to the amount of assets that can be transferred to the SPV;

− Credit institutions with a CRC ratio between 10% and 11%, and a Tier 1 ratio of at least 6.5% may transfer 60% of their assets to the SPV.

− Credit institutions with a CRC ratio of between 9% and 10% and a Tier 1 ratio of at least 6% may transfer only 25% of assets to the SPV.

Covered Bond Structures

The Spanish Covered Bond system is an integrated model. The issuer holds the cover pool in its balance sheet, and such cover pool is made of all the eligible assets. The cover pool, hence, backs all Cédula issues by the same issuer, regardless of the date of issuance.

All obligations relating to the Cédulas are obligations of the issuer as a whole and the Cédulas holders will be privileged creditors in the insolvency of the issuer (see below).

The French Covered Bond system is an integrated model, although credit institutions cannot issue Obligations Foncières directly but only through SCFs.

Credit institutions transfer eligible assets to the SCF which will finance the acquisition via issuance of Obligations Foncières.

The transfer of eligible assets is enforceable between the parties and vis-à-vis third parties from the date of execution of the assignment form (bordereau), and cannot be clawed back in the event that the assignor becomes insolvent at a later stage.

Servicing of the assets can only be carried out by a credit institution having entered into a servicing contract with the SCF.

The underlying debtor shall only be informed of the assignment in case of a substitution of the servicer of the eligible assets.

The OBGs are structured covered bonds. Transactions are normally structured as follows:

− A credit institution transfers eligible assets to a SPV, whose sole corporate purpose is to purchase such assets and to grant a guarantee in favour of the Covered Bondholders.

− The SPV purchases the cover pool assets by means of a loan granted or guaranteed to it by the credit institution (not necessarily the same one transferring the assets).

o The credit institution transferring the cover pool of assets (or another credit institution) issues the OBGs.

o The proceeds from the cover pool of assets purchased by the SPV are applied to satisfy the rights attaching to the OBGs, to the counterparties of derivative agreements entered into for hedging the risks related to the assets, and to pay for the costs of the transaction.

Over-Collateralisation

CHs: the amount of CHs issued and outstanding by an issuer cannot exceed 80% (5% for substitution assets) of the outstanding principal amount of all eligible mortgage loans in the issuer's balance sheet, excluding those attached to issues of mortgage bonds.

CTs: the amount of CTs issued and outstanding by an issuer cannot exceed 70% of the outstanding principal amount of all eligible loans to public institutions in the issuer's balance sheet.

Where the above thresh olds are exceeded, the issuer must reestablish them by taking some of the actions determined by the regulation (i.e. acquiring or amortising outstanding Cédulas, granting more eligible loans for the cover pool or making deposits of cash for the difference with the Bank of Spain).

− The total value of the SCF's assets must be greater than the total liabilities of the SCFs benefiting from a privileged status (that is, all the sums/proceeds deriving from the abovementioned eligible assets which are to be affected in priority to the repayment of the Obligations Foncières).

− SCFs are required to comply with a coverage ratio of at least 100%. The value of the coverage ratio must be declared twice a year to the Commission Bancaire.

− The coverage ratio is calculated by applying different weightings to classes of assets: senior bonds of securitisation SPVs, for instance, are weighted 100% if they are rated at minimum AA- (Fitch and S&P) and Aa3 (Moodys); 50% if they are rated A- (Fitch and S&P) or A3 (Moody's); and 0% below these ratings. Real estate assets securing eligible mortgage loans are weighted 50%. Replacement assets are weighted 100%..

− The SPV's assets must at least equal liabilities both on nominal and NPV basis, and the revenues arising from the cover pool of assets must be sufficient to pay coupons to bondholders and to cover the cost of derivative transactions.

− In order to allow the SPV to fulfill its obligations, the issuers are required to:

o adopt proper asset/liability management techniques and to perform specific controls at least every 6 months; and

o ensure that the proceeds from the cover pool of assets is always sufficient to pay for the OBGs coupons and for the transaction costs.

Special Protection For Covered Bondholder Upon Insolvency Of Issuer

− Cédula holders are privileged creditors by virtue of the Spanish Civil Code and the Insolvency Act. Upon insolvency of the Cédula issuer, the proceeds from the cover pool shall be applied to satisfy the amounts outstanding under the Cédulas (without enforcement of the collateral) with preference to all other issuer's creditors.

− All Cédula holders will rank pari passu among themselves in relation to the cover pool, regardless of the date of issuance of each Cédula.

− The Cédula holders rights shall not be affected by any judicial moratorium on the issuer's liabilities or by any voluntary arrangement between the issuer and the other creditors.

− In the event that the cover assets were insufficient to satisfy the Cédulas in full, the insolvency administrator will liquidate the replacement assets and, if this were insufficient, will obtain the necessary funding by any appropriate means to continue repaying the Cédula holders.

− The insolvency administrator appointed by the Court to administer the issuer's insolvency shall also administer the cover pool.

− The Obligations Foncières holders are superprivileged creditors, even in the insolvency of the SCF.

− As such, the Obligations Foncières holders have the right to be repaid prior to all other SCF's creditors, both privileged and ordinary, with all the proceeds from eligible assets or assimilated receivables, notes and securities, the proceeds of forward instruments entered into by the SCF as well as receivables from deposits made by the SCF.

− Furthermore, the judicial reorganisation or liquidation of the SCF or amicable arrangement between the SCF and its creditors shall not affect the rights of the Obligations Foncières holders and the general clawback provisions of French bankruptcy laws which may affect certain transactions during the 18 months prior to the opening of the insolvency proceedings (période suspecte) do not apply to SCFs.

− Finally, insolvency or liquidation proceedings of a company holding shares in a SCF cannot be extended to the SCF.

− OBG holders hold a preferential claim on the cover pool of assets and the OBGs are direct and unconditional obligations of the issuer.

− The guarantee granted by the SPV to the OBG holders must be irrevocable, first-demand, unconditional and independent from the issuer's obligations under the OBG. It will be callable upon the non-payment and insolvency of the issuer, and it will be limited to the cover pool assets value to ensure bankruptcy remoteness of the SPV.

− OBG holders will have the right, represented exclusively by the SPV, to file a claim with the issuer for full repayment of the Covered Bonds. In case of liquidation of the issuer, the SPV will be exclusively responsible to make payments to the OBG holders and will represent the Covered Bondholders in any proceedings against the issuer.

− All amounts collected in the issuer's liquidation procedure will become part of the cover pool and therefore used to satisfy the rights of the OBG holders. The redemption of the loan granted by the issuer of the OBGs to the SPV is junior to any outstanding claims of the OBG holders, swap counterparties, etc.

− In the event that the proceeds from the issuer's liquidation were insufficient to satisfy in full the amounts due under the OBGs, they will have an unsecured claim against the issuer for the shortfall.

Public Supervision

Bank of Spain and CNMV (securities Regulator) are the competent authorities.

Spanish law does not require a special cover pool monitor. The Bank of Spain directly supervises on an on-going basis that the issuer continues to comply with the over-collateralisation levels and with any other mandatory rules.

The CNMV shall verify that the statutory requirements and limits are complied with upon approval of each Cédulas issue.

SCFs are licensed by the Comité des Etablissements de Crédit et des Entreprises d'Investissement (CECEI) and supervised by the Commission Bancaire.

SCF must appoint a registered auditor with the agreement of the Commission Bancaire to act as a "Specific Controller".

The role of the Specific Controller consists in verifying that the SCF complies with the rules on over-collateralisation, "congruence" (matching of maturities and interest rate of assets and liabilities) and asset eligibility at all times.

Bank of Italy is competent authority.

The SPV is a financial intermediary registered with a "special list" provided for by article 107 of Banking Law and therefore subject to Bank of Italy's supervision.

The issuer will monitor cover pool through an "asset monitor". This must be an "audit firm" reporting at least once a year to the board of directors of the issuer. No specific reporting to the Bank of Italy is prescribed.

To view the entire article please click here.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

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Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.