Banco Santander Chile is planning to issue its first covered bond in June, after a new covered bond framework was introduced in the country in September, according to an official at the bank. Under the new legislation mortgages for the cover pool are originated after the bonds are issued.

Banco Santander Chile building in Santiago

Santander is due to launch a 68bn Chilean peso ($145m, Eu11.2m) issue with a 15 year amortising maturity in two months’ time, Emiliano Muratore, manager of financial management at Banco Santander Chile, told The Covered Bond Report. The deal is likely to be the first from a Chilean bank under the new framework.

Muratore expects the issuance of covered bonds to allow the bank to save some 10bp-30bp in funding costs versus senior unsecured instruments.

“There is no point in doing anything that would let us save less than 10bp,” he said. “We are confident that we will be able to achieve attractive levels versus senior unsecured.”

He said that long dated Santander senior unsecured bonds usually trade at around 90bp-100bp over central bank securities, which are the benchmark for capital markets transactions in Chile.

Muratore said Santander has wanted to issue covered bonds since the introduction of the new legislation.

“June is the soonest that we can do as we needed to do a lot of administrative work to prepare for it,” he said.

Financial instruments with a structure similar to covered bonds, Letras Hipotecarios, were issued by Chilean banks from the 1970s, but their use has been progressively abandoned, according to a 2011 report by Standard & Poor’s.

Muratore said that Letras Hipotecarios had a dual recourse principle like covered bonds, but unlike covered bonds a single letra was associated to a single mortgage instead of a pool of mortgages.

The new legislative covered bond framework introduced a structure more similar to the one used in European jurisdictions, he said, but there are notable differences.

The main difference is that under the new legislation banks are required to issue covered bonds and then to originate mortgages that can be used as cover pool assets in the following 18 months, according to Muratore.

Meanwhile, the cover pool should contain high quality assets, such as government and central bank securities. Corporate loans are allowed, but only up to 10%.

Strict criteria apply to the mortgages that can be used as cover pool assets, including a LTV under 80% and a ratio between the monthly mortgage instalments and the mortgagor’s income below 25%, said Muratore.

If an issuer is unable to originate enough mortgages in the 18 month period following the covered bond issuance it is then forced to buy back the bond, he added.

“To assure investors that we are confident we will able to originate enough mortgages we decided to include a yield penalty, so in case we needed to, we would buy the bonds back at unfavourable conditions for us,” said Muratore.

Issuers also need to make available for investors detailed information for every single mortgage included in the cover pool, he added.

Muratore said that because of the specificities of the Chilean covered bond legislation the first covered bond will mainly target domestic investors, but Santander plans to place an issue on the international markets in the future.

However, he said that Chilean issuers should engage in an extensive informational campaign to make international investors understand the local covered bond framework.

Muratore said that Banco Santander and other Chilean lenders raised this concern when the central bank asked for feedback on a draft covered bond framework in April 2012.

“But the central bank told us that the new framework was the best that could have been achieved under Chile’s general banking law,” he said. “Anything more similar to European legislation would have required a reform of the banking law, which would need parliamentary approval and take more time.”

Mortgage origination in Chile has experienced solid growth in the past five years, increasing by an average of 10.3% year-on-year to reach $57bn in 2012, or 20% of the country’s GDP, according to a December report by the Chilean ministry for the economy, development and tourism.

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