Banco Santander Chile is targeting July for launch of its first covered bond under a new framework, an official at the bank told The CBR, after Fitch yesterday (Monday) assigned a national triple-A rating to the issue and assessed key aspects of the law.

The programme provides for issuance up to UF20m (Eu703m, $915m) and maturity of 30 years, according to Fitch, which has rated it AAA(cl), on negative outlook. The first issue is planned to be for UF3m, with a final maturity of 1 July 2028 and an interest rate of 3.2%. The rating is the same as that for Santander Chile’s senior unsecured issuance.

Emiliano Muratore, manager, financial management department at Banco Santander Chile, told The Covered Bond Report that the bank’s covered bond programme was filed with the local regulator, Superintendencia de Bancos e Instituciones Financieras (SBIF), on Friday, and is therefore almost ready to be activated.

“Now we have to wait for approval from the supervisory authority and the central bank, which we hope to receive by early July,” he said. “We are planning the placement for that month.”

Regulatory approval is not expected to be withheld or protracted, with both the financial supervisory authority and the central bank willing to support the product’s development, according to Muratore.

Santander Chile is in preliminary discussions with rating agencies about an international rating of its covered bonds, but does not foresee issuing internationally in the near future, said Muratore.

In addition to Fitch, Santander Chile’s covered bond programme will be rated by Feller Rate, the local partner of Standard & Poor’s. Domestic issuance will be arranged and sold entirely by Santander, said Muratore.

“We will be doing a marketing exercise before issuing because it is a new product,” he said.

Financial instruments with a structure similar to covered bonds, Letras Hipotecarios, have been issued by Chilean banks starting in the 1970s, but their use has progressively dwindled, and Santander Chile’s issuance will take place under a new regulatory framework introduced by the Central Bank of Chile and the banking regulator in 2012, for the development of bonos hipotecarios.

An usual feature of the framework compared with traditional covered bond regimes is that the bonos hipotecarias are issued first, and then used to originate mortgage loans (mutuos hipotecarios) that will be used to finance residential properties – acquisition, construction, repair of “amplification”, according to Fitch – within 18 months after the bonds are placed. (See here for previous coverage.)

Fitch applied its covered bond rating criteria to rate Santander Chile’s issuance, but noted an exception.

“The covered bond criteria are normally applied to debt benefiting from a dual recourse against a financial institution and should it fail, against a pool of assets,” said the rating agency. “In the case of this transaction Fitch applies the covered bonds rating criteria, although recourse against the cover assets is only available indirectly.”

The rating agency assigned the bonds a Discontinuity Cap (D-Cap) of 0 for “full discontinuity”, mainly driven by Fitch’s assessment of the Liquidity Gap and Systemic Risk, and Systemic Alternative Management components of the D-Cap.

It said that there are no specific provisions in Chile’s legislation on mortgage bonds regarding these subjects. In the event of an issuer default the mortgage bond would likewise suffer a default, said Fitch, given that there are no liquidity provisions to ensure interest and principal payments due on the bonds post issuer default. As concerns Systemic Alternative Management Fitch noted that the Chilean regulation foresees that, in the event of issuer insolvency, the cover pool (including the mortgages and fixed income securities) will be tendered together with the mortgage bonds and could be taken over by another bank. However, such transfer would be subject to delays, said Fitch, preventing the timeliness of payments due under the bonds.

The rating agency also noted that mortgages originated under the mortgage bond programme are recorded in a special register, but the cover asset cashflows are not directly used to repay investors. However, it said it considers that the bondholders have indirect recourse to the cover assets given that there is a need to carry out a tender process following issuer insolvency.

Fitch did not give any uplift for recoveries due to the lack of information on the portfolio, which does not exist at the date of issuance date.

“This problem is magnified by the lack of overcollateralisation between the cover asset and the bonds, and the valuation of the assets stipulated by the Bonos Hipotecarios regulation,” it added, “which in Fitch’s view is weak because it fully considers mortgages with high levels of delinquency.

“Furthermore, in the absence of a tender at a higher value, mortgage bond holders will be treated as senior unsecured creditors from a recovery standpoint.”