On April 1, 2021, the Austrian government published a detailed draft proposal and request for comments to merge the three covered bond laws (Hypothekenbankgesetz, Pfandbriefgesetz, and the Gesetz betreffend fundierte Bankschuldverschreibungen) into one new covered bond law. The request for comments period ended on April 30, 2021.
The aim of the law is to implement the EU directive 2019/2162 on the issuance of covered bonds (gedeckte Schuldverschreibung) and covered bond public supervision (see our report, "Harmonization Accomplished: A New European Covered Bond Framework," published April 18, 2019 for our comments following the publication of the EU harmonization directive in 2019). The proposal follows years of work by the Austrian regulator to merge the existing covered bond laws, and aims to provide a modern and uniform basis for covered bond issuance while ensuring a level playing field for Austrian issuers within Europe. The new law will enter into force and replace existing laws on July 8, 2022.
Overview Of The Proposal
The proposed law is referred to as the "Pfandbrief" law and we would expect the majority of future issuance to take this name. The law confirms the dual recourse in Austrian covered bond law, while proposing two European gedeckte Schuldverschreibung labels: "premium" or "normal". Some issuers may wish to issue using the current covered bond names, which is allowed if new issuances of Hypothekenpfandbrief, Kommunalschuldverschreibungen, Kommunalbrief, Kommunalobligation, or öffentlicher Pfandbriefrief meet the requirements to be considered European covered bonds under the new law. To achieve the "premium" designation, the covered bond must also satisfy article 129 of the capital requirement regulation (CRR).
Overcollateralization and eligible assets
The proposal includes an alignment of LTV requirement to the CRR, which increases eligible LTV to 80% from 60% for residential mortgages. We understand eligible commercial real estate LTVs will remain at 60%, but it is not clear whether the new law will allow for 70% if additional collateral is included as security as allowed per the CRR.
The proposal allows for covered bond issuance backed by other assets described as of "high quality". This will support the continued use of cover assets not mentioned in the CRR, but also opens up the possibility for expanding the currently permitted assets to include, for example, small and midsized enterprises as security for covered bonds in the future.
The law considers an overcollateralization (OC) requirement of a minimum 2%. The proposal allows for OC calculations based on net present value, but the nominal value of such OC cannot be lower than 2% nominal. The proposal does not discuss why the 2% OC level was chosen over the 5% considered in the amended CRR, but does, as far as we understand, suggest the minimum 2% should also cover administrative costs. However, the proposal also mentions OC for administrative costs, so we consider the point unclear based on the information available. The 2% OC is in line with the minimum for many covered bond programs in Austria. Finally, the proposal allows for higher levels of OC than the legal minimum.
The proposal adopts the principles of the harmonization directive regarding derivatives. The permitted purpose of derivatives in cover pools is limited to interest, currency, and obligor risk only. The proposal does not further limit, for example, the size of exposures, but confirms their bankruptcy remoteness (derivative cannot be called upon issuer insolvency) and the equal treatment of derivative counterparties and covered bond investors. Finally, it clarifies how derivatives are to be considered in the overcollateralization and liquidity coverage tests. The draft proposal does not clarify the ranking of any potential swap termination payments.
The proposal introduces a formal requirement for coverage of 180 days of liquidity needs. Current Austrian covered bond laws do not include requirements for coverage of 180 days' liquidity, but require that the issuer covers outstanding liabilities on a nominal and net-present-value basis. We do not consider the majority of rated Austrian covered bond structures to address 180 days' liquidity coverage following the insolvency of the issuer. We note that the proposed 180 days liquidity test considers the original maturity of bonds (excluding any extension unless the extension has been exercised). The proposal makes a distinction for the initial 30 days of the 180, which may be covered by assets fulfilling the liquidity coverage ratio (LCR) of the bank, leaving an additional 150 days to be covered by the cover pool. The proposal defines minimum quality of assets covering the 180 days' liquidity requirement and requires substitute assets be part of the cover pool and maintained on separate accounts. Given the liquidity requirement will consider executed extensions, we consider it likely that the 180 days requirement will be replaced by extensions after the insolvency of the issuer.
The existing Austrian covered bond laws do not exclude the extension of covered bond maturities, but most issuers do not make use of extensions. The proposal provides the option to extend maturities for all covered bonds up to 12 months, specifically mentioning a breach of the 180 days liquidity requirement as a valid reason. Generally, the extension is to help bridge a period of market disruption or breakdown, but provides the cover pool manager flexibility to repay within the 12-month extension period. The proposal discusses a number of different reasons to approve the extension depending on the status of the issuer. The FSA (FMA), resolution authority, or insolvency administrator may all agree to an extension. If the issuer is in resolution or insolvency, the proposal clearly states that an extension cannot lead to a change of the ranking and sequencing of covered bond investors. Therefore, it is likely that such an extension of maturity will lead to the maturity extension of other bonds.
Questions regarding the maturity extensions
The proposal clearly lists the transparency requirements for bonds issued with a soft bullet feature. Given covered bonds issued prior to the introduction of the new covered bond law are not required to fulfill requirements extension requirements, it is unclear how issuers can issue new covered bonds from existing cover pools. If the intention is to allow for the extension of existing covered bonds, the proposal is not explicit on the transparency and compensation for investors holding such bonds, which may be extended due to an extension of other covered bonds. Finally, the proposal leaves some flexibility and raises questions surrounding the market transparency of an extension trigger for issuers in resolution or insolvency, in our view.
Group and joint funding of covered bonds
The Austrian covered bond legislation allows for joint funding (Treuhandschaft) between financial institution without the transfer of the securing assets. The published proposal also introduces provisions for group funding reflecting the directive. We do not currently rate structures with such features, and would conduct a full legal review if necessary.
Clarification of responsibilities
The proposal introduces the concept of an internal trustee to monitor and report the management of the cover pool, which will replace current external trustee requirements. According to the proposal, an internal role ensures an improved insight and access to management, while it requires appointments and dismissal of the trustee to be reported to the FSA (FMA).
Furthermore, the proposal includes additional reporting requirements and issuer authorization requirements and establishes the oversight role of the FSA (FMA). We expect FSA (FMA) oversight of the internal trustee will ensure the proposed requirement achieves a comparable level of oversight as under current rules. The proposal does not include formal disclosure requirements, but calls for market-based solutions that fulfill the requirements of the directive, which current solutions do not fully fulfill, according to the proposal.
Proposed Amendments Pose No Immediate Rating Impact And Will Lessen Legal Complexity
The proposal will merge the three current laws into one, thereby lessening the legal complexity for Austrian covered bonds. The proposal will be implemented for all issuances starting on July 8, 2022. An issuance made before this date is not required to fulfill the requirements of the proposal, and outstanding bonds will be grandfathered with the original designation. Any issuances made afterwards will require the whole program to comply with the new law. An internal trustee must be appointed within 12 months of the implementation date.
The proposal adopts the current regulation that issuers are permitted to maintain multiple cover pools, and although we expect most issuers will adapt existing programs to the new rules, some will consider establishing new covered bond programs in line with the new law. Due to uncertainty of the cost of managing the new system, we expect some issuers will undertake additional issuance prior to the introduction of the new law.
Given we do not consider the 180 days' liquidity requirement to be covered by the current legal setup, coverage of 180 days liquidity by holdings of collateral or extendable maturities will result in an additional collateral-based uplift of one notch for some issuers. The proposal is for LCR assets to cover part of the liquidity requirement, but the location of such LCR assets on the issuer's balance sheet remains unclear. We would expect all liquid assets for the 180 days liquidity coverage to be registered to the benefit of the cover pool for us to consider the liquidity covered in line with our criteria. The additional notch reflects our view that the liquidity allows the issuer to access the market to raise funds against the assets and help avoid payment disruption.
The proposed regulatory overcollateralization is below our minimum levels for most of our current ratings, and therefore we do not expect these changes will have any ratings impact (see "Covered Bonds Criteria," published Dec. 9, 2014).
Investors should be aware of the details of new terms and conditions for covered bond programs arising from the new legislation. In particular, existing issuances without soft-bullet features may be subject to change, although the proposal is not entirely clear on the process. We also believe that the proposal's higher eligible LTV ratios and the possibility that new eligible assets will increase our measure of credit risk, and might also encourage further issuance of Austrian covered bonds by increasing the eligible assets for issuances.
Pending finalization of the law and legal review, we do not expect our ratings to be affected by the updated law.
We believe the proposal supports our view of adequate liquidity coverage in the insolvency of an Austrian covered bond issuer, and it supports our view of a very strong legal covered bond framework in Austria.
- Covered Bonds Criteria, Dec. 9, 2014
- Global Covered Bond Insights Q1 2021, April 8, 2021
- Swedish Covered Bonds: Harmonization Plan Paves Way For Further Rating Uplift, Feb. 4, 2021
- Norwegian And Finnish Covered Bond Market Insights 2021, Jan. 21, 2021
- Danish Covered Bonds: Proposal Outlines Harmonization Plan, Nov. 23, 2020
- German Covered Bonds: Harmonization In Sight, Oct. 29, 2020
- Harmonization Accomplished: A New European Covered Bond Framework, April 18, 2019
This report does not constitute a rating action.
|Primary Credit Analyst:||Casper R Andersen, Frankfurt + 49 69 33 999 208;|
|Secondary Contact:||Barbara Florian, Milan + 390272111265;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.