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Guidelines for issuance of covered bonds

Ji Yeoun Kim

The Financial Supervisory Service (FSS) recently announced new Guidelines for Issuance of Covered Bonds by banks, effective from June 30 2011. The FSS expects that banks' ability to issue covered bonds will ease household debt problems as the public will enjoy greater access to long-term, fixed-rate loans.

The concept of a covered bond is not legislated for in Korea and a new definition has been created in the Guidelines to mean a bond which gives an investor a dual right of recourse against the issuer itself and a pool of collaterals provided by the issuer. The Guidelines also outline the following rules related to the issuance of covered bonds.

Covered bonds may be issued by a bank whose share capital is greater than W25 billion ($23.6 million) and a special-purpose company established by such bank in accordance with the Asset-Backed Securitisation Act, provided that the BIS capital adequacy ratio of such bank or special-purpose company at the end of the preceding fiscal year was greater than 10%.

A pool of collaterals may be composed of mortgage loans which: (i) are primary residential mortgage loans; (ii) have mortgage amounts exceeding 120% of value of mortgage loans; and (iii) have LTVs of 70% or less. Mortgage-backed securities issued by the Korea Housing Finance Corporation based on such loans could be included in the collateral pool. The issuer is also required to assess the eligibility of collaterals on a periodic basis and replace any ineligible items.

The total covered bonds issued must be 4% or less of the issuer's debt balance at the end of the fiscal year immediately before the issuance date and the maturity period of a covered bond must be one year or longer, but not exceed 30 years.

Finally, a securitisation plan containing the issuance of covered bonds must be registered with the Financial Services Commission pursuant to the Asset-Backed Securitisation Act.

Ji Yeoun Kim

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