Still waiting for covered bonds

Author: | Published: 1 Jul 2005
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Gernandt & Danielsson

Address

Stockholm

Telephone

+46 8 670 66 00

Fax

+46 8 662 61 01

The Swedish Covered Bonds Act (as amended) (Sw: lag (2003:1223) om utgivning av säkerställda obligationer) came into force on July 1 2004. The Act allows Swedish mortgage lending institutions to issue bonds secured by mortgage loans separated into a specific security pool.

Market participants expected Swedish mortgage lending institutions to convert their mortgage bond outstandings into covered bonds under the Act in late 2004 or early 2005, and that the leading rating agencies would publish their evaluations of the Swedish covered bond framework in early 2005. However, only one Swedish mortgage lending institution has applied to the Swedish Financial Supervisory Authority for authorization to issue covered bonds, and has not yet been authorized. Consequently, no Swedish covered bonds have been issued, and the rating agencies have not published their final evaluations.

One explanation for the delay could be concerns among the rating agencies relating to certain liquidity and refinancing risks in the event of issuer insolvency. The concerns relate in particular to a view, expressed by external legal counsel to the Swedish Bankers' Association, that neither an insolvent issuer of covered bonds nor its bankruptcy estate are allowed to issue covered bonds under the Act upon insolvency. A consequence is that it would not be possible for an administrator to raise finance in the market by issuing new covered bonds to service the timely payment under maturing covered bonds. This could have a negative impact on the credit rating of Swedish covered bonds. Until the rating agencies have published their final evaluations of the Swedish covered bond framework, there will be uncertainty in the market relating to the credit ratings of Swedish covered bonds and the possible need to amend Swedish insolvency laws, resulting in further delay in the issuance of Swedish covered bonds.