In the run-up to the expected year-end secondary legislation on Italian covered bonds (see ASR 5/30/05), Dexia Crediop has moved ahead with its program that functions much like what the market can expect from future covered bond issues.

"Specific legislation regarding covered bonds has been enacted [via] an addition to the Italian securitization law - Law 130/99," explained a Dexia spokesman. "To date there has been no enactment of the necessary secondary legislation from the Bank of Italy or Ministry of Economics & Finance, which is expected by the end of the year but in this context the DCC structure functions on the basis of the securitization law, with specific arrangements tailored to make it similar to a covered bond."

Under the terms of the program, the notes must be backed by bonds issued by Italian local authorities presently held by Dexia Crediop. The notes are issued by an SPV named Dexia Crediop per la Cartolarizzazione - incorporated under Italian law (Law n.130/99) - which is in turn owned by Dexia Crediop and is consolidated within the Dexia Crediop banking group.

"[The SPV] is buying a portfolio from Dexia Crediop financed by the issue of ABS notes - the reason we say it is similar to a covered bond structure is because of the guaranty from Dexia Crediop to enhance the issue," added the Dexia spokesman.

At the moment no Italian financial institutions - aside from government related entities such as Cassa Depositi e Prestiti - are able to issue covered bonds. Dexia introduced its structure in May 2004, and arranged an issuance program one year ago that securitizes Premier Metier assets and enables Dexia Municipal Agency to use the resulting notes as collateral for its covered bond program. Under the 10 billion ($11.7 billion) program, Dexia issued a first series of notes, series 2004-1, later that month. And last week, Dexia announced its new 2005-1 series, a 1 billion issue split into two classes of notes.

The A class notes, underwritten entirely by Dexia Municipal, will be supported by an unconditional Dexia Crediop guaranty. The B class notes, underwritten by Dexia Crediop, will be used to trap excess cash remaining after the payment of senior costs and expenses as well as principal and interest due on the A class notes.

In order to achieve the same rating as Dexia Crediop, currently rated AA' by Fitch Ratings, Aa2' by Moody's Investors Service and AA-' by Standard & Poor's, the notes underwritten by Dexia Municipal are backed by an unconditional guaranty from Dexia Crediop on principal and interest.

The Dexia spokesman said that the series of notes issued last week are structured in a similar fashion as the May 2004 program but the structure was more economical this time around. "While the structure may be the same, there has been a lot of improvement on pricing," he said. "It's less expensive than the initial issue, which cost 5.5 basis points. This time the pricing was 1.7 basis points, because of the improvement in the cost of funding of Dexia Municipal Agency, the French Covered Bond issuer of Dexia Group. Dexia Municipal underwrites the notes and uses them as collateral for its covered bond issuance under French law."

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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