McKee Nelson Sets Up New Covered Bond Team

McKee Nelson has assembled the first covered bond team to advise issuers and underwriters on the sector.

Partners John Arnholz and Kenneth Marin will lead the new initiative, which will be incorporated into the firm’s existing securitization and structured finance practice.

The new team is working with issuers, including non-banks, on hybrid structures that feature the dual recourse arrangement typical of covered bonds.

Last April’s Federal Deposit Insurance Corp. (FDIC) policy statement clarifying the treatment of these bonds under certain circumstances emphasized the intent of fostering growth of the covered bond market.

The U.S. Treasury Department’s recent meetings with regulators, bankers and other financial services industry members supported the statement by encouraging covered bond issuance as a way to bring liquidity to the home mortgage market.

The FDIC’s statement “helps clear the way for significant growth in U.S. covered bond issuance,” Arnolz said in a McKee Nelson release. He added that although the firm predicts the market will need to develop, in time it should "serve as a significant source of capital for borrowers and lenders as well as an attractive asset class for fixed income investors.”

To date, there have been only two covered bond transactions completed in the U.S., with the law firm serving as an adviser on both. However, European covered bonds are nearly a $3 million market and a major source of bank funding, according to the release from McKee Nelson

In Europe, covered bonds have been attractive in countries where legislation protects investors from insolvency risk or receivership involving the issuing bank.  In the U.S., the first covered bonds were issued in 2006, and comprise just a fraction of the $11 trillion in outstanding home mortgage debt.

Marin said the FDIC policy should relieve market participants’ concern regarding the treatment of the underlying collateral in the case of potential issuer bank default, stating that it “brings clarity to the issue and lays the foundation for future growth in covered bond issuance.”