Belfius Bank announced the mandate for its first covered bond this (Friday) morning, a deal that could be the first Belgian Pandbrieven and comes after the National Bank of Belgium granted it and KBC one of two licences they need, with the central bank having addressed this and other topics in circulars completing the country’s regulatory framework.

Belfius mandated Deutsche Bank, HSBC, Natixis, Nomura, Rabobank and Belfius as joint leads for its debut, which is expected to be launched after it hosts an investor conference call early next week.

Meanwhile, KBC Group’s chief financial officer yesterday (Thursday) reportedly stating that the bank plans to issue Eu2bn-Eu3bn of covered bonds a year, and may sell an inaugural deal before year-end.

Both banks on Tuesday received authorisation from NBB to issue Belgian covered bonds.

Under Belgium’s covered bond framework issuers will need to obtain “general” and “specific” authorisation to issue covered bonds. The former is based on NBB deeming the credit institution to have the organisational capacity to issue covered bonds in terms of factors such as risk management, internal auditing, and IT systems, while the specific licence is for individual programmes, or, if issuance is not organised on the basis of a programme, for individual issues.

The requirements for these licences were set out in circulars released by NBB on Monday of last week (29 October), which explain how the central bank will implement the laws and royal decrees governing covered bond issuance in Belgium, thereby completing the regulatory framework.

From NBB’s website it is not clear whether the authorisations granted to Belfius and KBC constitute the general or specific licence, but The Covered Bond Report understands that they represent the general go-ahead, as an official at Belfius said that the issuer had completed this step but not yet obtained a programme-specific licence.

One of the two circulars published by NBB is aimed at cover pool monitors, setting out their various responsibilities, while the other is aimed at issuers’ responsibilities. There, in addition to the conditions for obtaining the aforementioned licences, NBB sets out its requirements in relation to matters such as cover registers, liquidity tests, exchange rate and interest rate management, definition and valuation of cover assets, and reporting obligations.

The central bank also explained its approach to setting issuance limits. This was set at 8%, based on cover pool assets as a share of an issuer’s total assets, under a royal decree published 11 October, although the royal decree granted NBB the discretion to set tighter limits or, in exceptional circumstances and on a temporary basis, to allow an issuer to exceed the 8% cap.

Johannes Rudolph, head of covered bond research at HSBC Trinkaus, noted that the limit is defined as the ratio of cover assets to the credit institution’s – not the group’s – balance sheet, and that the issuer has to report once a quarter in a particular format on this to the central bank.

Interestingly, NBB’s circular is silent on its right to waive the 8% cap to allow issuers to exceed it in certain circumstances, only focussing on the discretion it was granted to set more restrictive limits on a case-by-case basis.

However, market participants said that they understand that both options are available to the central bank despite the circular not addressing the question of a possible breach of the limit.

“Our understanding is that in normal circumstances the 8% cap will apply,” said one official at a Belgian bank, “but that on a case-by-case basis upon granting a licence the central bank could decide that a lower cap should be applied.

“Then, on the other hand, there is also the possibility of a higher cap, but that needs to be seen as an exceptional case,” he added, “such as if an issuer has reached the cap but needs to top up OC in the event of falling house prices or to avert a default if a bank is in a liquidity crisis.”

In general, an upward deviation from the 8% limit would not be part of “normal course of business”, he said.

NBB said that it will assess the necessity of setting more restrictive limits by taking into account the impact of covered bond issuance on an issuer’s collateral base, and that it expects issuers to set internal limits that demonstrate the following, as described by Natixis analysts:

• a diversified source of funding (both secured and unsecured);
• a buffer of unencumbered assets enabling the bank to face a situation where the senior unsecured wholesale market is shut;
• and a buffer of unencumbered eligible assets enabling the issuer to deal with the maturing substitution assets.

Such a policy should, according to NBB, be described in the file submitted by a credit institution in relation to the general licence, and the related quantitative data should, if applicable, be updated in the file for the specific licence.