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Covered Bonds are a hybrid between asset-backed securities/mortgage-backed securities and normal secured Covered Bonds. Mortgage lenders primarily use them and act as a tool for refinancing. Investors holding covered bonds have a right to a pool of issuer assets, which provides additional protection to investors.
These bonds obtain legislative support, making the instrument bankruptcy remote.
These bonds obtain bankruptcy remoteness through contractual features.
With respect to covered bonds, the cover pool and the liability for investors both fall on an issuer’s balance sheet. The increasing cover pool is secured and it remains constrained in case the issuer is forced to go through bankruptcy.
The covered bondholders have to face dual recourses – one of the issuers and the second one on the cover pool.
The cover pool may be dynamic or static, subject to the structure.
Since the primary exposure falls on the issuer, any prepayment risk is absorbed by the issuer.
Covered bond ratings are normally higher than the issuer’s rating. Internationally, covered bonds enjoy the prestige of a maximum of 6-notch better rating as compared to the issuer’s rating.
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