Covered Bonds: Credit & Market Risk Workshop

Course Objectives

The analysis of covered bonds backed by mortgages and public sector assets. Prepare yourself to assess the risk and rewards inherent in Covered Bonds.

• Specifically, participants will be equipped to:
• Use a structured analytic approach to evaluate the risk profile of covered bonds
• Understand the legal framework used to issue covered bonds in key jurisdictions
• Identify risks to continued payments in the event of an issuer default
• Distinguish the credit quality of cover pools
• Assess the impact of programme features on ratings
• Evaluate the relative risks and rewards of covered bonds versus alternative funding instruments (e.g. RMBS, CMBS, unsecured debt).

Target Audience

Investors, credit risk managers, issuers, regulators, bankers and other professionals who need to understand the key risks and rewards of covered bonds.

Content

INTRODUCTION

Industry overview

• Features of covered bonds
• Motivations for issuance
• Covered bonds versus unsecured financings versus securitisations

Analytic approach to credit

• A structured approach to analysis: purpose, payback, risks and structure
• Application to different types of covered bonds.

RISKS TO REPAYMENT

Issuer risk

• Credit quality of the issuer: Issuer Default Rating (IDR)
• The link between IDR and rating of the covered bond
• Evaluating the issuer’s business organisation: origination practices, client base and IT systems
• Implications of covered bond issuance on bank ratings

Cover pool risk

• Characteristics of eligible assets
• Static analysis: residential mortgages, commercial mortgages and public sector pools
• Drivers of PD’s based on specific asset pools
• Recovery assumptions: timing and magnitude based on collateral and jurisdiction
• Calculation of expected defaults and losses
• Portfolio realisation analysis
• Impact of dynamic pools on creditworthiness
• Understanding cover pool credit quality under various stress scenarios

Operational risk

• Scope of asset monitor’s role and relevance to performance
• Appointing a substitute manager and providing back-up servicing

Continuity risk

• Considering asset segregation, liquidity gaps, alternative management and covered bond oversight
• Cash flow analysis.

STRUCTURE

Legal framework

• Understanding the differences between regulatory (special-law) and contractual (general-law) framework
• Segregation of cover assets
• Ranking of covered bondholder claims in a bankruptcy scenario
• Likelihood of interruption of payments
• Role of supervisory authority

Debt profile

• Priority of payment
• Bullet terms: hard versus soft, extension risk and call options

Programme features

• Asset / liability management: maturity, interest rate and currency mismatches
• Assessing potential liquidity gaps
• Substitute assets
• Hedging and associated counterparty risk
• Overcollateralisation: use of asset coverage tests (ACT), enforceability
• Selected Assets Required Amount (SARA) provisions

Pricing

• Activities of the central banks
• Credit tiering
• Basel II implications for investors
• Current market conditions: impact on spreads across the sector
• Relative value: risk vs. return across asset classes
• Jumbos versus private placements.

MONITORING PERFORMANCE

• Comparison of cover pools and covered bonds exposure to credit and market risks
• The need for vigilance in turbulent times.

Workshop Times