As emerging economies are going through the market transition, more financial instruments are being implemented and improved. Covered bonds are no exception with Azerbaijan, Brazil and Turkey already one step ahead of Croatia and Mexico, which have also expressed a keen interest.
Azerbaijan is to become the first CIS country to issue covered bonds, making it possible for Azeri banks to securitise their accumulated mortgage portfolios.
The National Bank of Azerbaijan (NBA) is drafting a bill on covered bonds under the guidance of the International Finance Corporation (IFC). NBA hopes the bill, once passed by Parliament, will allow local banks to raise funds for mortgage lending.
Brazil will create a covered bond market as financials prepare locally-tailored structures, allowing the all-in cost to come in under that of a traditional ABS fund – at DI plus 1.20% for an AAA guaranteed structure.
Such transactions will appeal to mid-sized banks as they need to shore up their capital now that the central bank is getting tougher on subordinated debt treatment and reserve requirements. The banks also need money to keep up with the origination of loans as portfolios grow by more than 20% a year.
A year ago Turkey took a major step towards the creation of a covered bond market by passing its eagerly-awaited covered bond law. It allows lenders to issue debt to back housing loans of 20 years or more and requires borrowers to pay a deposit equivalent to 25% of a property's value, with the rest covered by the mortgage loan. Banks may levy a penalty of 2% of the loan amount if customers pay off the debt earlier than agreed. The measure also increases banks' powers to seize a property if loan repayments are not met.