An emerging asset class

IFR Covered Bonds 2009
3 min read

Emerging economies are developing an increasing number of financial instruments and covered bonds are no exception. Azerbaijan and Turkey are already one step ahead of Brazil, Croatia, Kyrgyz Republic and Mexico, which have also expressed a keen interest.

Azerbaijan will become the first former Soviet state to issue covered bonds, which will make it possible for Azeri banks to securitise their accumulated mortgage portfolios. The Republic's State Securities Committee registered a M55m (US$69m) covered bond prospectus from the Azerbaijan Mortgage Fund on May 29 2009.

The AMF's covered bonds will carry an annual rate of 3% with a seven-year tenor and will total more than the previously expected size of between M10m and M55m. The securities will be exempt from commission by the Baku Stock Exchange. "This step was taken in order to support the development of [the] mortgage bonds market," according to the BSE board of directors.

The government of the Caucasus country and the International Finance Corporation are very close to establishing a foundation for securitisation of the commercial real estate mortgage sector in Azerbaijan. The country is also working on a securitisation law.

The IFC and Azeri finance officials met in Baku in April to finalise work on the Bill on Covered Bonds, which the central bank has been drafting under IFC guidance since last May. Depending on market conditions, Azerbaijan may see securitisation deals of existing assets this year.

Two years ago, mortgage lending from the AMF was suspended. Local banks now perform mortgage lending at their own expense. The mortgage portfolio in the Republic is estimated at about M300m, with a potential to rise to M1bn.

The IFC will also conduct due diligence on the Azeri banks' mortgage lending practices to eliminate problems and prepare recommendations on further improvements.

In 2007 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 – the rest will be 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 Kyrgyz Republic and Armenia are among the other countries known to have been considering legislative amendments to make covered bonds and securitisations deals possible, with the former believed to be a bit further along in developing its legislation.

Brazil had planned to create a covered bond market in 2008 but the agenda was hijacked by financial circumstances and FGCs came as a replacement.

Bakyt Azimkanov