Fitch Ratings said in a report today that Korea's proposed covered bonds act should boost issuance.
The legislation will address investors' preferential right to cover pool assets, over-collateralization (OC), disclosure and reporting – all issues that are considered important for investor protection. If enacted, it would provide an inaugural legislative framework for covered bonds in Korea
Under the Korean covered bonds act, investors have a preferential claim to a cover pool in the event of the issuer's bankruptcy. The ring-fencing of cover assets from the rest of an issuer's balance sheet for the benefit of covered bond investors is a pre-requisite for a covered bond to achieve a rating higher than the senior unsecured debt of the issuer, said Fitch.
The legislation also specifies the dual recourse nature of the covered bonds, which Fitch said will allow covered bond investors to have a senior unsecured claim on the issuer if cover assets alone are insufficient to pay off the covered bonds.
The introduction of a 5% minimum OC level is also a positive for covered bond investors.
Total issuance amount of covered bonds will be capped at 8% of an issuer's total assets at the end of the previous fiscal year, under the proposed legislatio
“The proposed rules are broadly similar to those found in other established jurisdictions in including definitions of eligible issuers, eligible cover assets, maximum loan-to-value ratio of mortgage loans in a cover pool, and a minimum OC level,” said Fitch analysts. “