NIBC has launched an inaugural, test issue off a new conditional pass-through covered bond programme, a privately placed Eu1m transaction that has been rated triple-A by Fitch and S&P, with their assessments highlighting the advantages of the structure for the issuer.

The issuer is expected to also issue publicly off the programme, which it has been working on since last year. A public deal would be a rare test of investor appetite for pass-through covered bonds outside Denmark’s unique system, and, if successful, would break new ground in the market.

Issuance with partial pass-through structures has been confined to deals structured to be used as repo collateral and an SME backed structured covered bond launched by Commerzbank in February. Any NIBC covered bond off the new programme that is placed with end investors would therefore be the first publicly sold covered bond issued under a legislative framework.

“The covered bond programme will be the first of its kind with a conditional pass-through payment obligation structure, which mitigates asset and liability mismatch risk,” Standard & Poor’s said today (Thursday).

Like Fitch, it assigned a triple-A rating to the programme and the first series issued off it, a Eu1m December 2014 issue with an extended due for payment date in December 2046.

“NIBC is making this first private issuance while seeking to register the programme with De Nederlandsche Bank, the Dutch central bank,” added S&P.

Fitch’s and S&P’s ratings of the covered bonds are on stable outlook.

As analysts had expected, Fitch assigned a Discontinuity Cap of 8 to the covered bonds, for minimal discontinuity risk. The rating agency said this is due to the pass-through structure and a three month interest reserve including senior costs for the bonds.

The breakeven asset percentage (AP) that Fitch applies for the triple-A rating is 90%, which compares with a breakeven AP of 84.7% that the rating agency applies in relation to its A+ rating of NIBC’s other covered bond programme, which uses a soft bullet payment structure.

The bank has only issued one public deal off that programme, a Eu500m deal from March 2011, and Fitch considers it to be “dormant” due to the amount of time that has lapsed since the last issue. This reduces the covered bond ratings’ maximum uplift above the issuer rating, and led to a downgrade of the covered bonds from AAA to AA- in October 2012 — although the issuer has disputed the “dormant” assessment. The subsequent downgrade to A+ was due to a cut of the issuer rating.

In obtaining triple-A ratings of the new programme NIBC has secured the rating benefits that are seen to be one of the main drivers for the establishment of a pass-through programme, with the related advantage of lower overcollateralisation requirements.

NIBC officials provided The Covered Bond Report with some details about the programme and what they have dubbed its “conditional pass-through” mechanism, noting that that is only a slight modification of a traditional soft bullet mechanism.

“The main difference with conventional bonds is that our conditional pass-through structure has been designed to ensure an orderly wind-down in case of an issuer default,” they said. “The programme will be Dutch law-based, Ucits and CRD-compliant, and will benefit from stable triple-A ratings.

“It is important to stress that NIBC has a hard obligation to repay any covered bond at its scheduled maturity date, meaning that a five year bond needs to be repaid after five years.”

According to NIBC’s description of the programme, the conditional pass-through mechanism is triggered per series when all of the following occur: a covered bond reaches its maturity date; NIBC is not able to redeem the bond; and the proceeds of the partial sale of the cover pool by the Covered Bond Company (CBC) would not be sufficient to redeem the relevant covered bond.

In the event that the pass-through mechanism has been triggered, the CBC attempts to sell a (randomly selected) part of the cover pool every six months, subject to certain conditions: the CBC will only sell if the proceeds of the sale are sufficient to redeem the relevant bond without a loss on the bond; and no deterioration of the amortisation test for the remaining outstanding bonds as a result of the sale is allowed.

As long as a successful sale cannot be initiated principal proceeds and excess interest will be distributed to the pass-through covered bonds, with the coupon payments continuing at their original level but switching to a monthly frequency. Bonds that are not in pass-through continue at their original level and original coupon payment frequency.

According to NIBC, another feature of the pass-through structure is that later maturing covered bonds are protected from time subordination through an amortisation test which includes a hard OC minimum of 15%. A breach of the amortisation test would result in all NIBC covered bonds becoming pass-through covered bonds, irrespective of their maturity date.