A new Georgian covered bond law will provide a solid foundation for the development of the asset class in the country, according to Moody’s, which said the legislation contains strong safeguards but also certain weaknesses in line with some European frameworks, and allows for pooled issuance.

The National Bank of Georgia (NBG) submitted the covered bond law to the Georgian parliament in late 2021, according to the rating agency, and it is expected to be submitted to parliament this month.

“The new law, if approved, will open the way for covered bond issuance in Georgia,” said Moody’s, “and support the development of the country’s capital markets.”

The rating agency cited several “strong safeguards” for investors that it deems similar to rules in other European countries. These include elements such as provisions to preserve the credit quality of cover pool assets, at least 5% nominal overcollateralisation (OC), the maintenance of a liquidity buffer, and oversight by a cover pool monitor.

Weaknesses cited by Moody’s – which it, again, noted are also present in some other European countries’ frameworks – are the possibility to mix commercial and residential mortgages, no LTV limits on asset issuers add to cover pools as voluntary OC, and no provisions to limit interest rate and currency risk.

Georgia’s legislation provides the opportunity for smaller banks to access funding in the new market via pooled issuance off a refinancing platform.

“Refinancing platforms consist of mortgage covered bonds issued by a commercial bank (a refinancing bank) and backed by loans (refinancing instruments) to debtor banks,” said Moody’s. “The refinancing instruments are secured by the mortgage loan assets of the debtor entity (the refinancing programme of the debtor bank, the cover pool of which includes the mortgage loans of the debtor).

“The refinancing structures are subject to the same requirements of the law as other mortgage covered bond programmes with regards to the liquidity buffer, OC, regulatory oversight and LTV limits, among other things.”

The refinancing bank option was illustrated in an NBG presentation last July.

Photo: Georgia’s parliament, Tbilisi; Credit: Marcin Konsek/Wikimedia Commons