A Spanish law from the end of September introduces a new type of covered bond, bonos de internacionalización, that gives Spanish banks greater flexibility for funding export loans and optimising their balance sheets, said a Moody’s official, with pass-through structures easier to achieve, for example.

Effective 27 September, the new law (Law 14/2013) allows Spanish banks to issue export finance bonds, or bonos de internacionalización (BIs), which are backed by a specific cover pool of loans that finance exports and the international expansion of companies, according to Moody’s.

This is a fifth type of legislative covered bond in Spain, coming on top of three types of cédulas, and bonos hipotecarios (BH), although it is really only cédulas that have been issued, backed by public sector debt (cédulas territoriales) or mortgages (cédulas hipotecarias).

The BIs that were made possible by the September law are in some ways similar to a new type of cédulas that was created in July last year, cédulas de internacionalización (CIs), which can be backed by guaranteed export credits, but there are several differences and there has not been any issuance of CIs.

In a comment on the new type of Spanish covered bond Moody’s today (Tuesday) said that the introduction of BIs adds more flexibility to the funding of export loans, with Spanish exports one of the main contributors to potential economic growth over the coming years.

José de Leon, senior vice president at Moody’s, said that the law expands banks’ funding opportunities to support the growth of exports.

“By enabling bonos de internacionalización the regulator is giving banks another funding tool and allowing them to optimise their balance sheet,” he told The Covered Bond Report.

He noted that the September law assigns BIs the same preferential treatment as other Spanish covered bonds in terms of capital requirements and taxation, thereby paving the way for them to be treated the same as comparable cédulas by the European Central Bank under its repo framework.

“The law provides for a new type of ECB collateral with the same favourable treatment as other covered bonds,” said de Leon. “Whether there would be end investor appetite for this type of bond remains to be seen but it seems that it would be readily available for use with the ECB.”

A covered bond analyst noted that supporting financing of small and medium-sized enterprises (SMEs) is a hot topic at the moment for European regulators, and that SME backed assets may be allowed as collateral for a third longer term refinancing operation (LTRO) from the ECB that is being talked about in the market.

“BIs could thus feature big there,” he said. “And in that context the bigger rating stability pass through structures would bring is worth a lot.” (See below for more on the pass-through angle.)

According to de Leon BIs have a weaker credit profile than CIs but allow for refinancing risk to be reduced.

He said that BIs allow for lower levels of overcollateralisation (OC) compared with the requirements imposed on CIs and that the eligibility criteria for cover pool assets are looser for BIs compared with CIs. Unlike for CIs, loans granted to private export companies that do not feature a guarantee from a public sector entity or credit insurance are eligible as collateral, and, under certain conditions, do not need to be classified as having “high credit worthiness”.

“However, BIs may also present lower refinancing risks than CIs because issuers can more easily create pass-through structures, where the amortisation of the bonds stems from the cash flows received from the cover pool,” said de Leon.

This aspect hinges on a key difference between the cédulas and bonos types of covered bond, namely that while the former are backed by all the eligible assets on an issuer’s balance sheet the latter are backed by a specific, segregated cover pool of eligible assets. The structure involving an earmarked cover pool rather an issuer’s overall loan book reduces asset encumbrance, and it is this aspect that ties in with discussions that are said to be underway in Spain about possible changes to the country’s model for mortgage backed covered bond issuance – including the move to bonos hipotecarios-type of issuance.

“The introduction of BIs supports the debate that is going on about cédulas hipotecarias,” said de Leon.

The aforementioned covered bond analyst said that, as another type of collateralised funding, BIs would increase the amount of assets that banks can encumber and that discussions about reducing encumbrance in other areas of the bank, such as by a move away from cédulas hipotecarias issuance, would make sense in this context.

Pass-throughs easier

De Leon said that although nothing legally prevents issuers of any type of covered bonds from issuing pass-through covered bonds a segregated cover pool eases the issuance thereof.

“The implementation of such a [pass-through] structure for most types of covered bonds appears much harder than it is for BIs or BHs because the issuers have issued multiple series of covered bonds with different hard bullet maturities backed by the issuer’s entire balance sheet, either mortgage or public sector loans,” he said. “In addition, there seem to be legal uncertainties as to whether the clauses to make payments on the notes pass-through upon issuer default would be enforceable.”