Presentation on theme: "Mexican Covered Bonds November 2007 NY:2918745.1."— Presentation transcript:
Mexican Covered Bonds November 2007 NY:2918745.1
Fundamentals of covered bonds generally The merits to the Issuer of covered bonds Domestic markets vs. International markets Expected Ratings for covered bonds in Mexico Relevant Mexican regulatory issues Monolines Other special considerations Transitioning into new jurisdictions from the traditional European model (examples of the US and Canada and lessons to be learned) Market values Currency issues (traditional Euro market for covered bonds vs. US Dollar market vs. MxPeso market)
STRUCTURE DIAGRAM Mexican Trust Covered Bondholders/ Bond Trustee Mexican Financial Institution Seller [Financial Institution] Interest Rate Swap Provider [Third Party/ Bank] CB Currency Swap Provider Other Sellers Covered Bond Guarantee Interest as first beneficiary under the Mexican Trust and pledge under Deed of Change Monoline [Third Party/ Bank] CB Currency Swap Provider Swap Guarantee Repayment of Intercompany Loan Intercompany Loan Covered bonds Covered Bond proceeds Note Policy Consideration Assignment of mortgage loans and related security Monoline Financial Institution Issuer
What is a Covered Bond? A full recourse debt instrument that is secured by a segregated pool of assets. –Recourse both to the issuing entity (the “Issuer”) and a substituting pool of collateral –Typically high-quality, over-collateralised mortgage assets –Other assets currently used are municipal loans, shipping leases (Germany only) and social housing loans (UK only) Bullet Payments Fixed Rate Cash flow from the assets is used to purchase other assets if needed Ratings are usually AAA/Aaa Currency – EUR / GBP / USD / Other No covered bond has ever defaulted The issuance is regulated by a specific legal framework or on a contractual basis. CBs are issued by a bank with a dynamic pool of earmarked assets on the balance sheet of the issuer collateralizing the bonds. The bonds are bankruptcy-segregated and excluded from the bankruptcy procedure of the Issuer. CB holders have a preferential claim on the segregated collateral assets should the Issuer default. The 4 Key Features of Covered Bonds (CB)
Decisions to take Currency – MXP or EUR/USD? Which investors to target and why – onshore or offshore? Choosing the right benchmark The right number and type of ratings Volume of individual transactions and liquidity of overall MCB market Correct blend of jumbos versus private placement/other currencies Coordination of funding activities amongst Mexican issuers The frequency of roadshows
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Covered Bonds – How – Linked or delinked ratings Legal Framework De-linked Rating Approach? YesNo Notching up Issuer Credit Rating or Overcollateralization/ Self committments Asset Quality Analysis Adequacy of Cashflows Surveillance / Full Review of Issuing Bank
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Covered Bonds - How 1 Analysis of the legal and regulatory framework 6 Rating committee considerations 5 Cash flow analysis under stressed assumptions 4 Determination of the asset quality of the cover pool 2 Analysis of the issuing bank 3 Specific information requirements for the issuing bank 7 Regular surveillance * Arrows in both directions visualize that this is an interactive and iterative process
INFONAVIT tu derecho a vivir mejor tu derecho a vivir mejor Covered Bonds in Mexico Covered bond legislation has yet to be established in Mexico. Credit Institutions’ Law has to be modified for Banks issuing Covered Bonds. Banco de Mexico’s Circular 4/2006 do not allow Credit Institutions to pledge assets to guaranty the issuance of Certificados Bursatiles backed by mortgage loans. IPAB (Mexico’s Deposit Insurance Corporation) considers all assets in a failed bank as collateral for its insurance payments. We think Structured Covered Bonds are viable for the issuance of covered bonds for non-banks in Mexico. Structures may be designed to achieve dual-recourse, a defining characteristic of covered bonds, which protects investors from loss and acceleration in the event of an issuer insolvency.
INFONAVIT tu derecho a vivir mejor tu derecho a vivir mejor Covered Bond Issues. Covered bond legislation needs to be established in Mexico. Issuer: Minimum Net Worth. CB issuance size limits. Eligible Assets: Maximum LTV in Mortgages and other types of assets. Asset/Liability Caps and other risk mitigants: Minimum ratio of nominal value of the assets to CB nominal. Average life of the CB vs. average life of assets. Interest expense on the CB vs. interest income from assets. Market value vs. Par value of the asset pool. Independent verification of market value of the cover pool backing CB. Responsibility of the Common representative of the notes issued, and the availability of a substitute common representative. Mortgage Insurance or Full wrap from a monoliner insurance company (assumes global AAA rated) A substitute servicer must be designated.