Romania could have an amended covered bond law by early 2012, which would kick-start issuance in a country where there has been none despite legislation having been in place since 2006, according to members of a working group.

A covered bond law has been in place in Romania since March 2006, but there has been no issuance because the law is not fully aligned with international standards, according to bankers in country, and a lack of interest because of alternative investments for local funds.

National Bank of Romania

Market participants established a working group in the first half of 2010 to improve the legal framework for issuing covered bonds after an overhauled pension system had begun to pave the way for private pension funds in Romania to start investing more.

“Until now, pension funds had various investment alternatives and they were mainly looking for higher yields,” said Irina Neacsu, head of debt capital market at Banca Comerciala Romana, who sits on the working group. “At the moment, given the current market conditions, the safety of the investment is of utmost importance.

“Therefore, secured bonds are becoming more appealing.”

The working group – comprising local banks and their respective parent companies, the Romanian Banking Association, the National Bank of Romania, and the Romanian National Securities Commission – identified covered bonds as a viable alternative for bank refinancing.

“The overarching aim of this initiative is to develop the local capital market and create investments for local investors,” Neacsu told The Covered Bond Report, “and to diversify the funding sources for banks, given that they have a critical mass of assets (mortgage loans and public sector loans), which could be refinanced through covered bonds.”

The existing legislation was a roadblock, according to the working group, because it was inconsistent with international standards because each bond issue had to be backed by its own dedicated set of loans, as opposed to one cover pool allowing for multiple issues, and a static cover pool, with administrators only replacing mortgages included in the cover pool if they no longer comply with the eligibility criteria.

In addition, the law does not allow for issuance of public sector backed covered bonds.

Neacsu said the group is upgrading the legal framework using the German Pfandbrief legislation as a benchmark.

The improved framework will consist of an amendment to the 2006 law as well as secondary legislation.  The amendment will provide for:

●      The establishment of two cover pools, one for mortgage and housing loans and one for public sector loans, with an active and dynamic administration

●      2% minimum overcollateralisation

●      A split of responsibilities/roles between the relevant competent authorities (central bank, securities commission)

●      Active management of cover pools

●      The establishment of the institution of trustee

●      Internal registries and transparency obligations of the issuer

●      Special provisions regarding the bankruptcy of issuers and the enforcement of cover pools (role of the cover pool manager, servicing of pools, enforcement of cover pools)

Secondary covered bond legislation will be related to the agent, the portfolio structure, internal registry, and stress tests on the cover pools.

“In general the maximum limit allowed for supplying the pool and for the substitution of receivables in the relevant cover pool with supplementary assets should not exceed 20% of the cover pool value,” added Neacsu.

The law is now being subjected to final drafting in the working group and will go to the National Bank of Romania and the Romanian National Securities Commission. It is then expected to go to the ministry of finance, and then parliament.

Adrian Sacalschi, deputy head of branch, Frankfurt, at FHB Mortgage Bank, which has assets in Romania, also sits on the working group, and said that he expected the law would go through parliament at the beginning of next year.

“If the Ministry of Finance gives it the OK then the approval process should go pretty quick,” he said, “and we hope to have something for next year.”