The U.K. is looking toward an early March implementation date for its new covered bond regime that uses a statutory framework instead of a contractual one.
Under a statutory framework, covered bond deals are structured under a specific legislation, while in a contractual regime these transactions are not bound by one law.
Although U.K. issuers have been successful issuing deals under a contractual framework, implementing a statutory legislation provides comfort to jittery investors who have been reluctant to test the waters under current global credit constraints.
The nation's structured covered bonds are largely seen as a strong structure, although there is still room for a dedicated law that makes the structures compliant with the guidelines of public company UCITS (Undertakings for Collective Investments in Transferable Securities) and thereby rewards issuers with a more favorable 10% risk weighting.
Speakers at the recent Information Management Network inaugural global covered bonds conference held in London touched on this subject.
"The value that we have put on legislative framework also gives investors some comfort as to what assets can be used," said Christophe Coustille, who spoke at IMN and is on the structured and project finance team at Veolia Environment.
The new covered bond legislation should impose stricter criteria on asset quality and issuers, HSBC said. It actually works in much the same way as the contractual framework used in past U.K. structured covered bond deals. "We've ended up not a million miles away from where we were in the beginning," said conference participant Simon Gleeson, a partner at Clifford Chance.
Although Gleeson said that some technical issues remained unresolved, he was still positive that these would get ironed out in time for the March 6 implementation deadline. "The U.K. regime is going to end up where we want it, as is evidenced by everyone cooperating," Gleeson said.
Joanne Riddell, policy advisor at the Financial Service Authority (FSA), said there has been overwhelming response from market participants who are expecting higher-quality issues under the new regime. "Existing U.K. covered bonds will be submitted for approval under the new law-the regime was constructed so that no structure would be noncompliant," conference panelist Riddell said.
However, some market players are quick to point out that while being UCITS-compliant brings additional comfort, covered bond legislation doesn't really ensure positive credit performance. Investor concerns about the quality of the collateral backing covered bonds mean they have become more selective in their choices.
"Who you are as an issuer is very important, and the type of assets included is also important," said conference panelist Arjan Verbeek, head of covered bond and ABS structuring at BNP Paribas. "The whole idea is that you want to create a safe instrument, and investors want to see prime assets and make sure they get paid."
Under a statutory framework, legislation will vary from jurisdiction to jurisdiction and might not provide guidance for situations such as the Northern Rock debacle. "We also have to remember that it's a two-way process - with more legislation across Europe, the market will get some common ground, but differences will exist because of the different legal jurisdictions," Verbeek said.
Unregulated structures should still appeal to issuers looking to test deals backed by various assets that aren't allowed under the legislation. In France, which has a specific statutory legislative framework, the trend recently has been to move away from a regulatory framework.
Simon Martin, the head of covered bond structuring for France and Italy at BNP Paribas and an IMN participant, said that issuing outside the legislation also meant that investors were becoming more sophisticated when looking at structures. "Structural innovation will be less than we have seen in the past two years, but the price and interest are still there," he said.
As the capital arbitrage provided by securitization structures disappears under Basel II, it's become increasingly difficult to securitize. This factor, coupled with current market constraints, means issuers are increasingly looking to test other options. "We are looking away from securitization because of spreads and are increasingly looking to the covered bond option," said Tanja Pour, the director of securitization and covered bond structuring at Societe Generale and a conference panelist.
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