Covered bonds

Answer It is important to recognize where all of the protons (hydrogen atoms) are. If you cannot do this, then you should review Chapter 1, which covers bond-line drawings. Only one proton can leave behind a negative charge in an sp orbital. All of the other protons would leave behind a negative charge on either sp or sp hybridized orbitals. So the most acidic proton is... 

A recent review discusses the chemistry of ylides and their reactions with transition metal complexes.425 This article integrates platinum yhde chemistry with that of other metal ions, and has sections covering bonding. 

The German Pfandbrief and Enrepean Covered Bonds Market... 

This chapter describes the German mortgage-bonds or Pfandbriefe market, its institutions, and working practice. We also consider other aspects of the European covered bond market. The instruments themselves are essentially plain vanilla bonds, and while they can be analysed in similar ways to US agency bonds and mortgage-backed bonds, there are also key differences between them, which we highlight in this chapter. Mortgage-backed securities are described in Chapter 11. 

While covered bonds are often regarded as similar to asset-backed securities (ABS) and mortgage-backed securities (MBS), many noteworthy differences exist between them ... 

The assets behind the covered bonds assets remain on the originator s balance sheet, even though they may be maintained in distinct pools or lodged in special purpose affiliates. However, in the case of ABS or MBS, the assets are segregated from any other assets and are usually off balance sheet and placed in a special purpose vehicle (SPV). 

The covered bond issuer is the source of the principal and interest cash flows, whereas the actual assets provide those payments in the case of the ABS/MBS. 

Eligible assets for covered bonds are clearly defined by law and are substitutable. Therefore the asset mix varies over time and is relatively heterogeneous. For ABS/MBS, the assets are of the originator s discretion and once the structure is finalised, no asset adjustments can generally be made. The mix of assets can usually be regarded as quite homogeneous. 

Asset quality is a measure of the strengths of the specific structure created for the ABS/MBS. However, it is a function of the issuer and underwriting standards of the covered bond, as well as the features of each issues framework. 

The yields of a single covered bond within one maturity band currently vary by as much as 20 to 25 basis points. This is a sharp increase from the 6 to 8 basis points variations seen in 1999 and preceding years. We now focus on the factors that can cause such differences. 

The type of issuer is naturally a major influence and as an example of the impact this can have, covered bonds issued by the Landesbanken, which profit from state guarantees and from the fact that they are eligible assets for the covered bonds of the private mortgage banks, trade on average 6 to 8 basis points more expensive than the other issues. 

As more European countries aim to establish their own covered bond markets with updated legislation, investors are getting a larger choice of Pfandbrief-like products. Most of the laws are based on the established German framework and aim to provide the same high quality of asset, but slight differences still remain. Here we look at the differences between the main runners in the covered bond arena. 

EXHIBIT7.7 European Covered Bond Market as of 24 January 2003... 

Like other covered bonds, their initial existence dates back many years previous, in the case of Spain s offering, to 1869. A considerable number of cedulas have been issued in the domestic retail market since that time. 

There are, however, some key variances from Germany s mortgage law and perhaps the most important arises from the different geographical restrictions on lending business between the two. In the case of Lux-embonrg, public sector loans from the whole OECD area are eligible for refinancing via covered bonds without restrictions. 

The Irish covered market is the most recent in Europe. When Ireland sought to create their covered bond market, they looked at all the relevant laws already in place throughout Europe, and cherry-picked the most attractive factors from an investor s perspective. What made this initiative even more impressive was the fact that Ireland has no history in issuing mortgage bonds. 

A maximum of 10% of the cover pool can be commercial property loans and substitution assets cannot exceed 20%. To limit cash flow mismatching risk, the Irish bonds exhibit tight matching requirements. For example, the nominal value of the cover assets must at all times exceed the value of the corresponding securities. The aggregate interest from the assets must also exceed that of the covered bond and the currency of the cover assets must be similar to the related bonds. In addition to this, the duration of the cover assets must be greater than the duration of the bonds. 

Critically, it is only in Ireland where the regulator has further stipulated that the weighted average duration of the cover assets should not exceed the weighted average duration of the Irish covered bonds by a period greater than three years. ... 

This new Irish product provides an interesting enhancement to the range of high quality products available in this sector. The legal framework combines all the traditional elements of covered bonds from existing European markets with innovative augmentations that serve to strengthen credit quality further. 

New and sophisticated covered bond laws, offering significant improvements to the original Pfandbrief model, have been introduced in France, Spain, Luxembourg, and now Ireland. Germany has responded with its amendments to the Mortgage Bank Act. 

The legislation changes throughout the European covered bond markets, also bring another possibility a step closer—a European Pfandbrief. 

The real yield formula below has been taken from the Debt Management Office s Formulae for Calculating Gilt Prices from Yields, 15 January 2002 update, and it covers bonds with two or more remaining cash flows. The term quasi-coupon date, in the notes that follow the formula, means the theoretical cash flow dates determined by the redemption date—they are quasi dates because weekends and holidays may mean the true payment dates differ. 

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