The proposed United States Covered Bond Act of 2011 represents an improvement on contractual agreements that characterise outstanding covered bond programmes in the US, said Fitch yesterday (Monday).

Fitch said that, if enacted, the legislation would improve its assessment of US covered bonds.

Proposed legislation would allow for the creation of a separate covered bond estate, which would prevent the cover pool from immediate liquidation.

“The proposed framework is a considerable improvement on the contractual arrangements that govern existing US covered bond programmes,” said Vanessa Purwin, director in Fitch’s US RMBS team. “The framework would improve the cover assets’ realisation prospects under Fitch’s criteria by eliminating the need for the cover pool to be liquidated in its entirety shortly following issuer default.”

Fitch was also pleased by the bill’s attempt to address the conflict of interest between senior unsecured creditors and covered bondholders, by “enabling the issuer’s defaulted estate to take back excess overcollateralisation (OC) while ensuring the bondholders will not be harmed as a result”.

US covered bond legislation would permit cover pools to include auto loans, student loans, small business loans and even credit card receivables, Fitch noted. The agency believes that an expansion in eligible collateral would create more flexible financing for issuers and draw in investors with different risk appetites.

Fitch also commended the legislation for proposing “formal government oversight and participation in the covered bond estate post-insolvency”. The agency found this to be an improvement on existing arrangements, in which covered bondholders are not afforded separate attention from banking regulators.