The final draft has all the hallmarks of robust continental frameworks, such as the Pfandbrief law, but goes even further in terms of documentation and protecting the claims of creditors in insolvency situations, according to a lawyer involved in the drafting.
The final draft has been with the Ministry of Finance, which is treating the legislation as a priority, since the new government was sworn in at the end of last year. The draft now needs parliamentary approval to become statute, and with the right political urgency this could happen within a few months.
“We have a new government with an important agenda of introducing new legislation, which means there will be pressure on the parliamentary process to move certain projects quickly,” said Ivan Peeters, partner at Stibbe law firm in Brussels, which assisted with the drafting process. “The aim is to make sure the covered bond law is one of those projects.”
Between finalising the draft and handing it over to the Ministry of Finance, few changes were made, with the central features resembling other leading European frameworks.
“The Belgian law is close to Germany. But the biggest difference is that it will be more elaborate in terms of structuring deals, bringing it closer to securitisation or structured covered bonds and adopting a more Anglo-American approach to documentation,” said Peeters.
The legislation puts the segregation of assets into statute. An issuer faced with insolvency would split up its balance sheet, creating a general estate for all creditors and asset classes and then a special estate for each covered bond programme. Though on balance sheet, the special estate is defined as a separate part of the overall balance sheet of the bank and only serves creditors involved in that particular programme. It would stay outside of bankruptcy proceedings.
“It’s absolutely clear that the assets are segregated,” said Peeters. “And there’s a statutory obligation on the liquidator managing the bankrupt estate to cooperate in order to maintain the continuity of the cover pool (special estate) that remains entirely outside of the bankruptcy proceeding.”
In a post-insolvency situation, the legislation allows the manager to continue all activities necessary to support and maintain the portfolio. This includes raising additional liquidity through issuance, including for repo purposes, without needing a new banking licence. In this way it goes beyond the 2010 amendment to the Pfandbriefe Act, which allows post-insolvency managers to apply to BaFin for an issuing licence.
There will not be a general limit on covered bond issuance permitted by each institution. Rather, the regulator will assign limits on a case-by-case basis when banks apply for an issuing licence.
Residential assets will have an LTV limit of 80%, while the LTV for commercial assets will be capped at 60%. All transactions will initially need to be CRD compliant, but there is the potential for the regulator to allow non-CRD compliant transactions further down the line. A swap counter party is allowed to be in the same banking group as an issuer, but the liquidity line provider cannot be part of the same group, the law states.
Belgian quirks
“We had two aims: first, as a minimum to meet the prevailing requirements in the market and where possible to positively exceed them; and second, to take into account the specific aspects of the Belgian market,” said Peeters.
Belgium’s leading banks, Fortis and Dexia, have been restructured in recent years. The legislation demands that regulators protect the rights of covered bondholders during a restructuring. “It will be a statutory requirement that if the banking regulator needs to take restructuring action on a bank, it needs to do it in a way that protects the rights of covered bondholders,” said Peeters.
The drafters also included special provisions for Belgian “springing mortgages’, which come about when a bank takes an additional mortgage on the property when the credit situation of the mortgage holder is deteriorating. The value of the springing (or secondary) mortgages is less than the value of assets secured by original mortgages, and this is calculated by a formula set out in the law and approved by the regulator.