Delivering its promise, DePfa marketed its first issue last week, inaugurating the Irish covered assets market. Sources at the German-based bank said the issue should have priced by the end of last week.

"The primary legislation creating these new Irish instruments is the Asset Covered Securities Act 2001, which was passed on December 18, 2001 and came into force in 2002," reports Standard & Poor's. "During 2002, a number of necessary statutory instruments and regulatory notices were enacted with the result that in 2003 the system is now ready for use."

DePfa has an estimated $43.2 billion equivalent in assets eligible for an asset covered pool and has established a designated credit institution to issue its Irish public sector covered assets. At press times, sources at the bank were unable to comment on the bond issued in Global format but the deal is likely to sport a five-year tenor and should be approximately $3.2 billion (U.S. equivalent) in size.

Both Fitch Ratings and S&P have given the notes an expected triple-A rating. S&P said that the Irish covered assets are eligible for a delinked ratings approach. The rating agency said that it based this approach upon sufficient satisfaction that the timely payment of the rated securities is insulated from risks attendant to or on the issuer, therefore the insolvency of the issuer would not affect the cash flow to the investors. One of the more innovative features in the legislation is that it calls for segregation in the event of bankruptcy. If the designated credit institution or its parent company becomes insolvent, the bondholders and hedge counterparties would become the preferred creditors.

But the risk of maturity mismatches still exists, and analysts say there is still a need to ensure that the issuer will be capable to raise liquidity should it become insolvent. In a typical pass-through asset-backed transaction, the debt is amortized with principal proceeds from the assets. "The issue of finding adequate liquidity to refinance maturing covered bonds following the insolvency of the designated credit institution is substantially assisted by the drafting of Section 30 (for designated mortgage credit institutions) and Section 45 (for designated public credit institutions) of the Act," reported S&P.

"Designed primarily to protect the rights of the swap counterparties, they provide that the full benefit of the cover assets can be extended to any contract the purpose or effect of which is to reduce or minimize the risk of financial loss or exposure liable to arise from risk factors that may adversely affect [the institution's] permitted business activities,'" the rating agency said.

So far there has been no mention of the possibility of including mortgage-backed securities under the covered asset pool guidelines, which, if permitted, would allow mortgage lenders added flexibility in setting up their portfolios. The issue, however, is likely to come up in the future as the market matures and Irish mortgage lenders begin to realize the potential of securitization as an additional source of funding.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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