A draft amendment to Spain’s securitisation law released on Wednesday paves the way for a new type of Spanish covered bond that would facilitate conditional pass-through (CPT) features and allow SME loans as collateral, Moody’s said today (Monday), although BBVA analysts do not expect the instrument would gain much traction.

José de León, Moody's

The draft law, on “fostering funding for companies”, was put forward by the ministry of economy and competitiveness and would allow Spanish banks to issue structured covered bonds outside of the cédulas hipotecarias or cédulas territoriales legal frameworks, according to Moody’s.

José de León, senior vice president, Moody’s, said that the draft amendments to the securitisation law for the first time makes it explicitly permissible for securitisation funds to guarantee third party liabilities, and therein lies the key to a new type of covered bond.

“Section three, chapter 2 of the amendment opens the possibility of what I call a structured covered bond,” he told The Covered Bond Report. “This means that a securitisation fund, an SPV, could guarantee a bank bond. Only this paragraph opens the possibility of having a new type of covered bond that could be backed by whatever securitised assets the bank has.

“It also enables issuers to achieve certain structural features, such as pass-throughs, that are currently much harder to set up under traditional covered bonds.”

A covered bond analyst noted that the mooted structure appears similar to that for UK or Dutch covered bonds.

“The bank issues the covered bonds and a securitisation fund guarantees the issuance, with investors having a preferential claim on the fund’s assets and a senior unsecured claim on the issuer should the fund not be enough.” (See below for a depiction of the structure.)

The rating agency said that the proposed change in the law would allow issuers to select specific assets to secure the covered bonds rather than commit their entire balance sheet of eligible assets, as is the case for cédulas, and that having such a segregated cover pool facilitates the issuance of CPT covered bonds.

This would give Spanish issuers access to one of the key benefits of CPTs, namely the mitigation of the risk of a fire-sale in case of issuer insolvency, according to Moody’s. CPTs are widely seen as reducing refinancing risk, reducing overcollateralisation requirements while still allowing for higher ratings, and providing for greater rating stability.

Earmarking a specific cover pool of assets as collateral rather than committing an issuer’s entire balance sheet is a key feature of another type of Spanish covered bond, bonos hipotecarios, which like cédulas is law-based, but there has been no public issuance of bonos hipotecarios to date.

Moody’s said that because the structured covered bonds foreseen by the draft law would not provide recourse to an issuer’s entire balance sheet, overcollateralisation would be lower than that in the case of cédulas.

“But, by committing to a specific level of overcollateralisation, an issuer can affect the credit risk of the SCBs [structured covered bonds],” it said.

Another difference from cédulas is that an independent company managing the cover pool would be allowed to sell assets only when market conditions are favourable, according to the rating agency.

“Cédulas, which have bullet maturities, lack the ability to allow an independent management company flexibility in selling assets upon an issuer default,” said Moody’s.

The new type of covered bond would be able to be backed by a broader range of assets than those eligible as collateral for cédulas, according to the rating agency.

“Structured covered bond cover assets can include any type of loan, secured or not, such as loans granted to small and midsize enterprises, or corporate loans or bonds, which could be riskier than the mortgages or public sector loans that back cédulas,” it said. “However, by committing to a specific type of asset to back structured covered bonds, an issuer reduces its own discretion to change the risk profile of these assets over the life of the deal.”

De León said that the amendment is quite clearly aimed at expanding the range of funding tools that banks have at their disposal, also to finance a broader range of assets, and noted that the point is also stated in the preamble to the draft law.

“The preamble states that the amendment relating to the securitisation funds is about ‘removing those obstacles that have hindered the replication in Spain of some of the innovative strategies that have been successful and useful in Spain’s neighbouring countries’,” he says.

Take-up chances ‘slim’

Agustin Martin and Aaron Baker, covered bond analysts at BBVA, said that implementation of the proposed legal changes would allow any Spanish issuer to sell structured covered bonds the same way that Commerzbank has issued an SME structured covered bond outside Germany’s Pfandbrief legislation.

However, they do not expect structured covered bonds to gain traction in Spain, citing reasons such as “clear differences between the risk perception of SMEs in Germany and Spain” and improvements at the sovereign rating level, including associated higher rating ceilings, that reduce the necessity for issuers to turn to innovative techniques to achieve higher covered bond ratings.

The availability of bonos hipotecarios is another reason why Spanish banks would be unlikely to make use of the new type of covered bond, according to the BBVA analysts.

“Spanish issuers have the option to use bonos hipotecarios, which is a regulated instrument like cédulas hipotecarias, to introduce pass-through features or lower OC requirements without the need to introduce a novel and unregulated asset class,” they said.

They acknowledge that SME loans are not eligible as collateral for bonos hipotecarios, as would be the case for the new type of covered bond made possible by the securitisation law amendments, but notwithstanding this point out that there has not been any issuance of bonos hipotecarios since they were introduced in the early 1980s, “and despite of the recent higher focus from regulators on asset encumbrance issues”.

“Finally, in our view the only way peripheral SME covered bonds could have any traction would be by granting them the same legal status that cédulas in Spain or OBGs in Italy have,” said the analysts. “This has not been the case so far, with both countries introducing SME-backed covered bonds outside the cédulas or OBGs frameworks, respectively.”

Italy recently introduced a law allowing for issuance of collateralised bank bonds, with SME loans as a targeted asset class for collateral, but the bonds are separate to mortgage and public sector covered bonds issued under the country’s obbligazioni bancarie garantite (OBG) law. (See here for more on the Italian collateralised bank bonds or select Italy from the country dropdown menu.)