Spain’s Royal Decree Law 20/2012, which became effective on July 14, allows covered bonds to be backed by loans that finance export as well the as international expansion of Spanish firms. The new law offers further proof that the country’s banks have much fewer options in terms of traditional assets to support these bonds.
This is good news for Spanish banks since they have been finding it harder to access the capital markets. Issuing covered bonds allows them to maximize the European Central Bank’s (ECB) low-cost of funding.
The export-finance backed covered bonds, called cédulas de internacionalización or CIs, which Moody’s Investors Service expects the ECB to accept, will bring down issuers’ funding costs since covered bonds profit from lower haircut valuations versus securitizations. Additionally, the rating agency said that the ECB accepts self-issued covered bonds as collateral, although not self-issued senior unsecured debt.
The new cover pools that result from the implementation of the Spanish law may be less diversified than the typical mortgage pools. Moody’s added that the terms and conditions governing the underlying loans might be more complex than a traditional mortgage thus making them more challenging to monitor.
Despite the complexity, Moody’s said that these new cover pools will benefit from 43% over-collateralization and comprise loans due from or guaranteed by high credit-quality entities.
The rating agency also noted that if an issuer becomes insolvent, the investors’ preferential rights in these new covered bonds are comparable to those given to mortgage or public-sector covered bond buyers.
In another report released today, Moody’s published a comment on Intesa Sanpaolo Spa, which issued two series of residential covered bonds to investors who were part of the exchange offer that Intesa launched in June. This was for the public sector covered bonds that these investors held.
The exchange offer boosted Intesa’s share of the public-sector covered bonds by about 30%, permitting it to introduce amendments that relaxes some contractual obligations that lessen the public-sector program’s counterparty and other risks.
As a result of the weakening standards, the ECB and other investors in the bonds are consequently hurt when an issuer utilizes the covered bonds as collateral for loans. Moody’s analysts said.