Ireland has followed the lead of other European jurisdictions by proposing covered bond legislation based upon the model of the German Pfandbriefe legislation. The Asset Covered Securities Bill is expected to be enacted into law in the last quarter of 2001.
The Bill allows for the issue of credit enhanced asset backed bonds secured on mortgages or public sector loans. An issuer can build up a loan portfolio of mortgages or public sector loans from a wide range of countries (Ireland, other EEA countries, Switzerland, G7 countries and, in certain circumstances, any OECD country) with which to cover its bonds. An issuer can also enter into certain risk management transactions in relation to its mortgage or public sector loan portfolio but is, in certain respects, restricted as to what business activities it can carry out. The market will be regulated and supervised by the Irish Central Bank.
The Bill sets out rules similar to those applicable to German Pfandbriefe, French Obligation Fonciere, Luxembourg Lettres de Gage and other instruments of the same type in Spain, Denmark, Finland and Belgium. It provides for preferential rights for investors, clarity as to the procedures relating to the issuer's insolvency and an exemption from stamp duty upon the issue or transfer of asset covered bonds.
Add to this a common law system which will be almost instinctively familiar to lawyers and investors in the US, Canada, Australia and the UK and an existing system of relief from withholding tax obligations and the resultant package is likely to be pleasing to both issuers and investors. Particularly when allied with a favourable corporation tax rate of 20% on trading income (reducing to 12.5% from January 1 2003), the Bill should ensure that Ireland can compete with other jurisdictions offering covered bond regimes.
Domestic institutions such as First Active, AIB, Irish Life & Permanent and Bank of Ireland, with strong mortgage portfolios, will anticipate cheaper funding costs consequent upon the credit enhancement of the bonds. Foreign issuers may also find that the Bill puts Ireland even more firmly on the capital markets map and they may seek to move their public sector or mortgage lending activities to Ireland. DePfa Bank has indicated that its Dublin unit will, after the proposed internal restructuring, focus on public sector finance. The Irish market obviously lacks, and will lack for some time, the familiarity of the German market and liquidity is, as yet, untested. However, the Bill is certainly a development in the asset covered securities market that will be watched with interest.
Emer Hunt and Turlough Galvin
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