On the back of reassurances recently made by the Financial Services Authority that it did not intend to implement a rigid limit to covered bond issuance (see ASR 8/15/05), lenders Nationwide and Northern Rock have lined up respective deals due to come out before year-end.
"The FSA's 4% limit was always intended to be a soft limit but initially I think it created some uncertainty, especially among the smaller U.K. lenders," said one analyst at Dresdner Kleinwort Wasserstein. "I think that the market has positively viewed the [FSA's] concrete statement in its letter to the British Banker's Association and reiterates that they have a more relaxed view."
Some of these players, like Northern Rock, had long since breached the 4% soft limit set by the FSA but nonetheless remained active issuers. Northern Rock is expected to issue a GBP1.5 billion covered bond sometime this month. HBOS issued the inaugural U.K. covered bond in July 2003, followed by first issues by Northern Rock and Bradford & Bingley in 2004 and, this year, a debut by Abbey National. All these issues have adopted a similar structure, involving the sale of high-quality collateral to a bankruptcy-remote SPV, giving the covered bondholders recourse both to the issuer and to the underlying assets in the event of default.
"These active players have been in constant dialogue with the FSA and I think that by reiterating that it will work with lenders on a case by case basis, the FSA has cleared the path for newcomers to this market," said the DrKW analyst. Nationwide's debut issue is expected to come to market sometime during the second half of November with Barclays Capital and Deutsche Bank Securities as lead arrangers on the deal. "The U.K. covered bonds market is still in its development phase and everything that helps liquidity ensures the future development of the market," said one analyst.
Italy's covered bond
Cassa Depositi will launch a follow up issue to its covered bonds program. The Italian Ministry of Economy and Finance holds a 70% stake in Cassa Depositi and is legally obligated to maintain a majority stake, so the transaction is treated as a government related issue and not applicable to private institutions.
"Cassa Depositi [has] the right to ring-fence assets in a separate fund ("patrimonio separato") to satisfy collateralized creditors, protecting them should CDP become insolvent," explained DrKW analysts. Should Cassa Depositi become insolvent, this collateral pool is used to satisfy covered bond creditors' claims. But unlike with other covered bond products, any residual claims over and above this can then not be brought to bear against CDP.
"There is no full recourse to [Cassa Depositi ], no real double claim against the issuer and the collateral pool as is typical for covered bonds, meaning there are greater similarities with an ABS issue than is usually the case for covered bonds," continued analysts at DrKW
Cassa Depositi's bonds are based on a special legal framework. They have to be weighted at 20% and not the typical 10% given to other covered bond structure. "[Cassa Depositi ]'s issuance model cannot be employed by other institutes and thus does not offer a blueprint for covered bond issues by private Italian banks," said analysts at DrKW. "The latter will use the extension of the Italian securitization law (law 130/1999), which envisages a construction similar to U.K. covered bonds."
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