Banco La Hipotecaria of Panama closed a debut, $11m (EUR9.65m) five year contractual covered bond last week, rated BBB by Fitch.

Fitch had assigned an expected BBB rating to up to $30m of issuance on 24 October and lead manager Brean Capital on Monday of last week (3 December) announced that Banco La Hipotecaria had issued $11m of 5.5% September 2023 bonds in 144A format.

The issuance is off a $200m structured programme established by the Panamanian bank.

Fitch said that although there is no covered bond framework in Panama, it believes the contractual arrangements for the programme and local legal framework are effective so that the cover assets are sufficiently ring-fenced from the remaining portion of the issuer’s balance sheet.

“The covered bondholders will benefit from a dual recourse as the covered bonds will rank pari passu, among themselves and will be Banco La Hipotecaria’s (BLH’s) direct, unconditional and unsubordinated obligations,” said the rating agency. “In the event of an issuer default, the covered bondholders will also benefit from security in a special purpose vehicle (SPV) that holds the collateral trust assets assigned to it by BLH and will guarantee covered bond payments. The collateral trust SPV isolates its assets from the estate of the issuer.”

Banco La Hipotecaria’s issuer default rating (IDR) is BB+, on stable outlook, by Fitch, which said the rating is capped by Panama’s BBB rating due to the cover pool’s exposure to the sovereign – 70% of the mortgages have government subsidies and around one-third of the borrowers are civil servants. The covered bonds’ rating has a two-notch buffer against a downgrade of the issuer’s IDR.

Fitch has assigned the programme a recovery uplift of three notches, based on contractual overcollateralisation (OC) of 25% providing more protection than an 11.7% BBB stressed credit loss. The covered bonds have a 12 month principal extension period and three month liquidity reserve and Fitch assigned one notch of payment continuity uplift (PCU), but noted that no more could be justified. There is no IDR uplift because there is no advanced bank resolution framework in Panama, the rating agency said.

The cover pool totals $39.6m and comprises 1,302 residential mortgages granted to Panamanian residents, according to Fitch.

Previously from Panama, Global Bank issued an internationally targeted $200m contractual covered bond in 2012, then launched a buy-back of all its issuance in 2016.