Covered bond

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Covered bond

“The Volvo of ABS. Boxey — but safe.”

Docs	Bond issuance: lots of trust deeds, indientures, fiscal agency arrangements, security documents and prospectuses. Juicy ground for willing attorneys 7	{{{docscore}}}
Amendability	Low. But usually little need. 2	{{{amendscore}}}
Collateral		{{{collateralscore}}}
Transferability	Pretty good. 8	{{{transferscore}}}
Leverage	Nope fully funded. 0	{{{leveragescore}}}
Fright-o-meter	Well it's mortgage backed so there's a little squeaky bummism there but basically snoresville. 3	{{{frightscore}}}

Covered bonds are debt securities issued by a financial institution and secured against a pool of assets designed to cover bondholder claims at any point of time. The assets stay on the bank’s balance sheet but, by dint of the security arrangements in favour of bondholders, are preferred claims in the insolvency of the issuer. They are excluded from the ravages of BRRD, among other things (see Art 44(2)).

Compared with ABS

Under a covered bond, assets remain on the balance sheet of the financial institution. Under asset-backed securities the financial instrument transfers them to an espievie and so gets them off balance sheet altogether. This means if defaults in the asset pool are higher than anticipated, the ABS holder wears the losses. In the case of the covered bond, the Issuer still has to pay.

See also

FWDM