The Dutch finance ministry is consulting on proposed changes to the country’s legal framework for covered bonds, including a 5% minimum OC requirement and the scrapping of a minimum rating threshold, with SME-backed programmes also said to be mentioned as a possibility.

Dutch Ministry of Finance, The Hague

The consultation was launched on 14 March and is open until 11 April, with the proposed changes due to come into effect in January 2015.

It follows discussions between the Dutch Association of Covered Bond Issuers (DACB), the Dutch central bank, and the finance ministry, which were last year reviewing the country’s 2008 covered bond legal framework. (See here for previous coverage in The CBR.)

The changes proposed by the ministry appear in line with amendments that the aforementioned discussions identified as being desirable, including, for example, introduction of a statutory minimum overcollateralisation (OC) level.

The consultation appears to be only available in Dutch, but according to Joost Beaumont, fixed income strategist at ABN Amro Bank, the minimum OC proposed is 5%.

“The main weak spot was that there was no minimum OC level besides the requirement for the bonds to be overcollateralised,” he said. “In practice OC is high, but the crucial thing is to have a minimum level written down.”

Other changes include a requirement for sufficient liquid assets to be held to, in the event of an issuer default, cover a six month period with respect to coupon payments and 12 months for redemptions, and the removal of a minimum rating requirement for new issuance of covered bonds.

As part of its supervision of Dutch regulated covered bonds De Nederlandsche Bank requires that covered bonds be rated at least AA-/Aa3. ABN Amro’s Beaumont noted that covered bonds of nationalised SNS Bank are rated below this and that the proposed change would therefore benefit SNS.

The proposed removal of the minimum rating requirement should be seen in the context of the introduction of investor protection in the form of a minimum OC level, according to Beaumont.

“The soft cap on total covered bonds issuance that the Dutch central bank applies by bank will remain in place, as will be the principle-based character of the Dutch law,” he added. “Also interesting to note is that the proposals leave room for the setup of covered bond programmes backed by SME loans.”

According to Beaumont the consultation documents refer to the possibility of there being demand for covered bonds backed by SME loans. Issuers have to designate the type of assets that will serve as collateral when establishing a regulated covered bond programme, so any SME issuance would have to be off a separate programme.

“Overall, we see the amendments as positive as they will strengthen the current covered bond law somewhat,” said Beaumont, “although the Dutch law remains ‘light’ compared to other countries like Germany and Belgium.”