Belgium’s KBC Bank plans to make its covered bond debut in the fourth quarter of this year or the first quarter of 2013 after the country’s parliament recently voted in favour of a legal framework dedicated to the funding instrument, the bank said in a results presentation out today (Tuesday).

KBC Group this morning released its results for the second quarter of 2012 and first half of the year, and in an accompanying presentation noted that the Belgian parliament recently approved the covered bond law. It said that KBC Bank is planning its first covered bond issue in Q4 2012/Q1 2013 to further diversify its funding base.

The bank had in previous investor presentations flagged that a covered bond legal framework was being developed in the country, but today’s announcement of its issuance plans comes around two weeks after the Senate followed the Belgian parliament’s lower house in approving covered bond legislation after a spur to push it through parliament before a summer recess. (For previous coverage of covered bond legislative developments in the country select Belgium from the country drop-down menu in the right hand column.)

Belfius Bank & Insurance, as Dexia Bank Belgium has rebranded itself, has also flagged its interest in issuing covered bonds, with its chief financial officer having previously said that it could start selling covered bonds as early as the third quarter. (See here for previous coverage.)

According to Florian Eichert, senior covered bond analyst at Crédit Agricole, KBC and ING Belgium are the biggest players in the Belgian mortgage market, followed by BNP Paribas Fortis, Axa Bank Belgium and Belfius. Axa Bank already issues covered bonds, albeit via a Société de Credit Foncier under the French obligations foncières framework.

“The biggest banks in Belgium have been looking to lower their funding costs as well as gain a new investor base by accessing the covered bond market for quite a while,” he said. “Until now, Belgium’s banks were mainly funded via retail deposits and occasionally through senior unsecured and RMBS markets.

“The passing of the law now opens a whole new chapter in their history.”

Belgian covered bonds are likely to be an interesting proposition for investors scrambling for investment opportunities, he suggested, with composite ratings likely to reach as high as triple-A, although this will depend on how rating agencies assess the Belgian framework, how issuers structure their cover pools, and the level of overcollateralisation.

Fitch yesterday (Monday) said that, at first glance, the new legal framework in Belgium appears to enhance the framework for covered bond issuance and securitisation in the country.

Crédit Agricole’s Eichert said that assuming a Timely Payment Indicator of “probable”, most potential covered bond issuers could get triple-A ratings from Moody’s, except for Belfius, where an issuer rating of Baa1 would limit any covered bonds to a Aa1 rating.

Potential Belgian covered bonds would be rated in the AA- to AAA range by Standard & Poor’s, he added, assuming the rating agency allocates Belgian programmes to category 3 under its classification system, to which he said S&P assigns new covered bond products.

As regards potential ratings from Fitch, Eichert said that he would assume Discontinuity Factors (D-Factors) of 20%-30%, reflecting that Belgian covered bonds would represent a new market, and that on the basis of this assumption final covered bond ratings could come in between AA+ and AAA assuming issuers hold sufficient OC for two notches of recovery uplift.

Fitch has proposed to make several changes to its covered bond rating criteria, including replacing D-Factors with Discontinuity Caps.

KBC Bank said that it has a strong retail and corporate deposit base in its core markets, which provides it with a stable funding mix. Its funding needs for 2012 are covered and a buffer has been established, it said, given that its long term funding needs are decreasing in light of continuing steps to reduce risk-weighted assets, it issued Eu2.25bn of unsecured long term debt in the first quarter of this year, and “substantial increases in stable funding have been registered in different entities of the Bank Group”.

The bank has access to three “solid” sources of EMTN funding, it added: public benchmark transactions; structured notes using the private placement format; and retail EMTNs.