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What are Covered Bonds?

Covered Bonds are a hybrid between asset-backed securities/mortgage-backed securities and normal secured corporate bonds. They are primarily used by mortgage lenders and act as a tool for refinancing.

Investors holding covered bonds have a right on a pool of issuer assets it provides additional protection to investors.

Who issues these Bonds?

Covered Bonds are issued by banks, corporates, and Non-Banking Financial Companies (NBFCs).

Types of Covered Bonds India

Legislative covered bonds - These bonds obtain legislative support which makes the instrument bankruptcy remote.

Contractual covered bonds - These bonds obtain bankruptcy remoteness through contractual features.

  • On a balance sheet
    With respect to covered bonds, the cover pool and the liability for investors, both falls on an issuer balance sheet. The increasing cover pool is secured and it remains constrained in case the issuer is forced to go through bankruptcy.
  • Dual recourse
    The covered bond holders have to face dual recourses – one of the issuers and the second one on the cover pool.
  • Dynamic or static pool
    The cover pool may be dynamic or static, subject to the structure.
  • Prepayment risk
    Since, the primary exposure falls on the issuer, any prepayment risk is absorbed by the issuer.
  • Rating arbitrag
    Covered bonds 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.

Features of Covered Bonds

  • It provides the benefit of dual recourse – on the cover pool and the issuer.
  • Considered safer than normal bonds because of additional cushion.
  • Due to the complexity and investment requirements, the investors are generally institutions and HNI.
  • The covered bondholders have a preferential claim against a dedicated pool of collateral assets or the proceeds of these assets.
  • The investors can exercise full recourse to the issuer.
  • There is a supplementary dynamic collateral pool that supports the covered bonds, to protect the funds of the investors.

Why Invest in Covered Bonds?

There are many good reasons that make covered bonds attractive for investors. It is a secure investment option yielding good yield. The bondholders enjoy the advantage of a dual recourse.

Advantages of Covered Bonds for Investors

Advantages of Covered Bonds for Investors

Safe Investment

Covered bonds is a safe investment option. It is relatively safer than asset-backed securities. The investment of investors is safeguarded even in the event the bond issuing institution is declared bankrupt.

Dual Recourse

The dual recourse feature makes covered bonds safer and right investment tool for risk averse investors. The issuer under Dual Recourse is required to do the payment to investors from its own cash flow.

Good Returns

Investment in covered bonds tend to provide good returns on investment. The rate of interest has ranged between 8.90 to 12.75%. For many investors, the Covered bonds interest rate is a key attraction.

Who are the Investors in Covered Bonds?

The covered bond investors are classified into small private investors to large institutional ones. It mostly includes investors who are aiming to invest for long maturity periods and willing to take only low risk.

The investors in covered bonds include:

1. Bank Treasuries

2. Pension Funds

3. Insurance Companies

4. Central Banks

5. Asset Managers

BondsIndia in the country provides a secure online platform to the retail investors looking for investment in Bonds. At BondsIndia, you can get detailed answer to what are covered bonds, it types, and make your independent decision.

If you are not yet a member and would like to explore more about bonds,

Frequently Asked Questions

BondsIndia has changed the way investors used to trade earlier. We have made KYC completely online and swift. We have the biggest library of listed bonds for potential trade.

The amount of investment in bonds depends on your financial goals, age, tenure, and risk-reward capacity.

You can make the minimum investment of Rs. 1000/- (face value) in Bonds. It can go upward depending on the face value of individual bonds.

There is no maximum limit to investment in Bonds. You can choose the amount considering your financial goals.

Yes, investing in covered bonds can be a safe choice.

The Dual Recourse feature make investment in bonds safe and secure for investors.

You can contact our Investment Experts for the help in buying bonds.

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