Luminor Bank has added Lithuanian assets to its cover pool, following the addition of Latvian mortgage loans in September, meaning that it has completed the anticipated pan-Baltic cover pool that it promised when entering the market with its Estonian debut in March.

Luminor opened Baltic covered bond issuance in March with a €500m five year deal issued under Estonian legislation and with a cover pool that at the time comprised only Estonian mortgage loans.

However, the move was part of efforts to create a pan-Baltic covered bond market with the potential to achieve critical mass that the three countries might struggle to achieve individually, and although Estonia was the only one of the three Baltic states to have covered bond legislation in place, neighbours Latvia and Lithuania have also been working on legislation.

At the time of the issue, Luminor said that it would add mortgage loans to its cover pool from Latvia and Lithuania, and it has now done so, with the addition of Lithuanian assets coming after it on 7 September added a Latvian portfolio.

Kaire Husu, treasury and ALM, risk management and projects unit manager, Luminor Bank, told The CBR that the completion of the pan-Baltic cover pool represents a big step forward in improving the capital markets in the Baltic region.

According to Husu, Estonian loans now make up 32% of the cover pool, Latvian loans 29%, and Lithuanian loans 39%, although she noted this may change slightly over time. As of the second quarter, a higher share of Luminor Bank’s overall loan portfolio comprised lending in Lithuania (44%) and Latvia (30%) than Estonia (26%).

The cover pool now amounts to around €2.4bn.

Although not unprecedented, multi-jurisdictional residential mortgage cover pools are rare in the covered bond market.

As it did when Latvian loans were added, Moody’s today (Wednesday) affirmed the Aa1 rating of Luminor’s covered bonds upon the change to the cover pool.

“The credit quality of the Lithuanian assets, which account for 38.5% of the total cover pool, is relatively similar to the Estonian and Latvian assets, and the collateral score for the cover pool remains at 10.0%,” it said. “The overcollateralisation (OC) remains well above the OC consistent with the target rating.”

It said non-Estonian assets could cause technical and administrative problems if the cover pool separates from the issuer and authorities appoint a cover pool administrator, noting that:

(i) courts and authorities of the other Baltic countries may not recognise the power and capacity of the cover pool administrator and refuse actions the administrator requests. Certain authorities and third parties may require a power of attorney from Luminor to accept the cover pool administrator’s authority;

(ii) banking secrecy requirements without customers’ consent may hinder the cover pool administrator’s ability to perform its role in the other Baltic countries;

(iii) the transfer of a cover pool to another entity might be subject to Latvian Financial Services Authority approval.

However, the rating agency said that Luminor’s undertaking to co-operate with cover pool administrators and borrowers’ information disclosure consents mitigate these risks.