To view the digital version of this report, please click here.
Belgium is now on a clear path to seeing the launch of the country’s first covered bonds in January next year as bankers expect the final details of long-awaited legislative framework will be agreed upon in the coming months.
The National Bank of Belgium, in consultation with the banking sector, has been working on a draft legislative framework.
Belgium is one the few European countries that has no dedicated legal framework in place, something that has prevented the country’s banks from taking advantage of the most cost-efficient form of public funding available.
It has been a long road to bring about legislation for the country that holds the record for operating without an elected government. Belgium was without a government for 541 days, having been run by a caretaker government from April 2010 to December 2011.
“The fact that the country was without a government made the prospect of introducing covered bond legislation impossible. And while it is taking longer than we would have hoped for, it should be hopefully complete by September/October with the first bond coming in early January,” said Frank Will, covered bond analyst at the RBS.
Market participants involved in the legislation explained that previous regulatory set-ups like that of Italy and the UK took a significant amount of time to iron out and at the end of the day the Belgian authorities just want it to be airtight before they give it the final sign-off.
The new law is likely to benefit issuers such as BNP Paribas Belgium, Fortis, KBC and Dexia and of the potential issuers that may sell bonds under the framework all eyes are on Dexia Banque Belgium, the 100% state-owned bank which will be looking to build up its term funding structure this year. The entity was spun out of Dexia at the end of 2011 after the bank had to be rescued by the French, Belgian and Luxembourg governments.
KBC is another bank for which the new legislation could prove useful.
Until now, Belgium’s banks have been relatively inactive in the public markets, issuing occasional senior unsecured and RMBS transactions, but mainly relying on retail deposits for funding.
At present the process is being held up by a number of nitty gritty details that include final provisions for the structure of Belgian covered bonds. “Investors want to know what happens in the event of an insolvency so they are trying to be extremely investor friendly and make sure the legislation is water tight,” said Will.
“The third quarter seems like a reasonable target to get this legislation approved,” said Sylvia Kierszenbaum, Belgium-based partner at Allen & Overy. “The proposed Belgian legal framework is very robust and we are looking forward to it being put in place.”
Two pre-draft bills are currently with the Belgian Minister of Finance. The further parliamentary process is expected to be initiated soon in order to allow the Belgian parliament to consider the draft regulatory framework.
“The proposed Belgian legal framework is very robust and we are looking forward to it being put in place”
“The Belgian government is also looking at what flexibility they can give to issuers that won’t be too unattractive to investors. For most borrowers the fact that their bonds are UCITs and CRD compliant is the most important thing to them,” said Will.
Belgian banks have been at a distinct cost disadvantage to other European credit institutions as they cannot offer investors UCITs and CRD-compliant bonds. One DCM banker said, in the past, issuers have been expected to add as much as 10bp to the price of a bond if it is not backed by a legal framework.
Syndicate bankers, issuers and investors are welcoming the fact that the final piece of the European covered bond puzzle that now see the country on a level playing field with its European counterparts as well as new jurisdictions that have recently opened up.
“The Belgian government is also looking at what flexibility they can give to issuers that won’t be too unattractive to investors. For most borrowers the fact that their bonds are UCITs and CRD compliant is the most important thing to them”
The new legislation is being modelled on Germany’s existing framework that will see issuers segregate assets from their balance sheets to be used to back covered bonds but will also incorporate some elements of the commonwealth structure.
“The Belgian proposed legislation contemplates ring-fencing assets on balance sheet and thereby follows the approach of the German Pfandbriefe model. Belgium also benefits from being the last western European country to introduce covered bond legislation so the Belgian authorities were able to draw on the experience of different jurisdictions,” said Kierszenbaum.
Reaction to the legislation has been resolutely positive as the European Central Bank said it welcomed the draft legislation. “It will enable credit institutions to issue covered bonds that are attractive to a wide range of investors and expand their ability to use credit claims as collateral, thereby enhancing access to sources of refinancing by credit institutions,” it said.
Embracing the new
Although borrowers in the country welcome the introduction of a new legislative framework, convincing AXA, the borrower with the only outstanding covered bonds to turn its back on the French framework will be no easy task.
AXA Bank issued the first non-traditional covered bonds in October 2010, a 10-year €750m RMBS-backed covered bond issue.
In what is now considered something of a backdoor structure, the Belgian bank issued its first covered bonds in France under the Obligations Foncieres programme because Belgium had failed to enact covered bond legislation in time for the sale.
“Belgium also benefits from being the last western European country to introduce covered bond legislation so the Belgian authorities were able to draw on the experience of different jurisdictions”
At the time, one of the leads explained that AXA needed to transfer mortgages from Belgium to France, and the easiest way to do that was through securitisation.
In April this year AXA Bank Europe again favoured the loyal support of French while marginalising its Belgian base when it sold a €1bn covered bond.
A banker at one of the lead management group of Barclays, BNP Paribas, Credit Agricole CIB, HSBC, Natixis and Societe Generale said that with the established Obligations Foncieres sector at AXA’s disposal it did not make sense for the issuer to wait for Belgium to introduce its own covered bond legislation and says it is committed to the Obligations Foncieres structure for future transactions.
“The Obligations Foncieres legal framework has over a 10-year track record that investors are comfortable with and they are also comfortable with AXA as a credit as it has such strong roots in France,” said a banker.
At the time of the offering AXA said it would not be wise to issue bonds under two different legislative frameworks.
The RMBS-backed transaction proved a hit, with 110 investors contributing to the €1.25bn book, though Belgian buyers were noticeably restrained, accounting for only 6% of the book.
The reason for this reticence came down to pricing. The offering priced at mid-swaps plus 70bp, inside OLOs, and offered investors a modest 5bp new-issue premium over AXA’s secondary curve. French investors by contrast took 43%.
According to bankers, once the Belgian covered bond market opens, a Belgian issuer may be able to achieve covered bond pricing at senior unsecured levels minus 50bp–100bp.
However, another banker said that it would still take some time before programmes were ready to go, even after the relevant bill had been approved. “What AXA has done is smart and I think it has offered investors what they wanted,” he said.
Under the terms of the new law, investors will have dual recourse to the issuing bank as well as the cover pool of assets. The cover pools can consist of residential mortgage, commercial mortgage loans, exposure to the public sector, risk on financial institutions and derivatives.
The cover pool can be composed of assets out of the five categories but per programme assets out of the first three need to represent a value of at least 85% of the pool.