Thursday, April 05, 2012

Covered bonds much safer securities than CDOs: analysts

SINGAPORE: Under a recent consultation paper launched by the Monetary Authority of Singapore, banks in Singapore may soon be the first to test market response to covered bonds.

While covered bonds are often mistaken to be a form of collateral debt obligation (CDO) which fuelled the subprime crisis in the US, analysts said it is not as toxic as CDOs and do offer a dual recourse for investors.
Covered bonds are debt instruments backed against a pool of mortgage assets and often mistaken as CDOs.
Gan Kok Kim, head of Group Investment Banking, OCBC Bank, said: "The main difference is you have dual recourse in the

covered bonds. If the assets go bad, it's okay because the banks are still paying up on the covered bonds.
"The bank is an ongoing business while CDO is typically in a SPV (Special-Purpose Vehicle). The CDO doesn't really have other businesses, so the investor is very dependent on the assets that the CDO has."
Bondholders can claim against the issuer or the pool of mortgages should either party default.
In the Monetary Authority of Singapore's proposal, only residential loans and derivatives can be included in the pool.

James Atkinson, senior associate, Norton Rose, said: "You have a third party- covered pool monitor who will be a qualified auditor, and be responsible for overseeing the quality of those assets and the issuer in complying with all the requirements."
With a ring-fencing of the cover assets, there will be a clear segregation of the covered bond assets with other assets.

"There could be a possibility that those assets in the covered pool are also suffering the same microeconomic factors that could be affecting the issuer at the point in time. Should that happen, the covered bond investors will be under some pressure," said Mr Gan.
Issuers of covered bonds, typically banks, are expected to top up the difference, should valuations of the pools fall below the agreed threshold level.

Bernard lee, CEO, HedgeSPA Research Fellow, ITI@SMU, said: "It gives the banks an opportunity to recycle their capital. However, covered bonds may not be the best way to do as compared to traditionally mortgage-backed securities. My hunch is this might be a way for regulators to test the market and over time, it'll be a way to develop a more mortgage-backed securities market."

The MAS is inviting responses from various market players by April 10.

View the original article here

Source From Channel News Asia

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