Raiffeisenbank a.s. has inaugurated the first Czech covered bond programme to enable access to international investors after the Czech Bond Act was amended in August, and has set its sights on eventually being able to use the programme to tap the Eurobond market.

Czech banks have been able to issue mortgage covered bonds, hypotecni zastavni listy, in Czech koruna under the country’s 1995 Covered Bond Act, but until recently a provision in the Czech Bond Act of 2004 prevented them from being able to access the international market because they could not issue bonds that settled directly in the euro-zone.

Before it was amended, the Czech Bond Act stipulated that bonds issued under it be first registered to an investor securities account in the Czech Republic, a feature that market participants had previously told The Covered Bond Report was a barrier to covered bond issuance.

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However, in August the act was amended to enable Czech banks to issue euro denominated bonds under English law, paving the way for them to access foreign accounts.

Maria Bazhanova, flow securitisation and covered bonds at BNP Paribas, said the changes to the Czech Bond Act allowed bonds in euro to be issued directly into the clearing systems such as Euroclear and Clearstream.

“Following these changes bonds can be used as collateral for monetary policy operations with the ECB or placed with European investors,” she said.

Raiffeisenbank already had a domestic covered bond programme, but took advantage of the legal change to set up an international programme, for Eu5bn, and recently launched a Eu500m December 2017 issue off it.

Barclays, BNP Paribas, and Raiffeisen Bank International were joint arrangers and dealers, and were advised by Allen & Overy, with White & Case LLP acting as legal adviser to the issuer.

Václav Valvoda and Sally Onions, partners at Allen & Overy, said the legislative change gives Czech issuers the ability to issue covered bonds that are more attractive to foreign investors, and thereby access liquidity through a previously untapped market.

When Raiffeisenbank launched its first issue off the international programme the ECB had yet to confirm that the covered bonds would be eligible as collateral for repo, but it is understood to have done so since.

Jan Pudil, executive director of treasury, investment banking and financial institutions at Raiffeisenbank a.s., said that the key factor behind the issuer meeting ECB criteria was its ability to issue and primarily settle the covered bonds directly in the euro-zone, which was not allowed under the Czech Bond Act until the August changes.

“In addition to the ability to use the covered bonds as collateral for transactions with the ECB,” he added, “our mid-term goal is to use the programme to directly sell the first covered bonds to investors on the Eurobond market.”

In addition to statutory features required by the Czech covered bond framework, the Raiffeisenbank a.s. programme includes structural features designed to make issuance more familiar and attractive to international investors, said Bazhanova at BNP Paribas. These include the possibility for an asset monitor, which is not required by law, and contractual over-collateralisation.

“The ECB eligibility is also quite important,” she said. “And after a first programme has been set up it’s easier for others to follow.”

Moody’s has assigned a A3 rating to the mortgage covered bonds, with a Timely Payment Indicator (TPI) of “very improbable”. The rating agency said the TPI reflects weaknesses and uncertainties regarding the Czech covered bond framework, in particular that the mortgage covered bonds will most likely be accelerated in the event of an issuer insolvency. Moody’s does not publicly rate Raiffeisenbank a.s.

As of 30 September the cover pool comprised assets totalling around Ck37.9bn (Eu1.5bn), comprising 28,637 residential mortgage loans with a weighted-average seasoning of 41 months and a weighted-average LTV ratio of 66.4%.

The overcollateralisation in the cover pool is 13%, none of which is provided on what Moody’s considers a committed basis. It said that the rating uplift due to OC is limited to one notch because of legal uncertainties about whether OC will remain in the programme upon issuer insolvency.

The rating agency said that notable aspects of the Czech covered bond legal framework include: a par value test, which ensures that covered bonds are always backed by at least the equivalent amount of assets; and the establishment of a mortgage estate (cover pool) in the event the issuer becomes insolvent. It noted that the issuer has also entered into certain contractual arrangements, such as eligibility criteria that restrict the eligible assets, an asset cover test that allows the issuer to introduce a certain level of OC, and the engagement of an asset monitor and a covered bond trustee.