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Covered bonds regime

This article outlines the pertinent issues with regard to the regulation of covered bonds under Slovenian law. The relevant statutory provisions are primarily contained in the Mortgage Bond and Municipal Bond Act (Covered Bonds Act).

The issuer of covered bonds shall be a bank only, licensed by the Bank of Slovenia (BSI), with its registered seat in Slovenia. The issuer is required to hold a special licence from the BSI to issue covered bonds. The bank applying for the licence must also demonstrate its capability to put in place an adequate system for identifying, measuring, controlling and assessing risks related to the covered bond issue.

Cover assets comprise mortgage and public sector lending. Eligible assets include (i) loans secured by mortgages or land charges in respect of residential or commercial property, (ii) replacement assets (exposures to certain public sector entities) and derivative instruments (if they are used to hedge risks provided that derivative instruments do not exceed 12% of the cover assets).

It should be noted that, at all times prior to maturity, the value of the asset pool must not be less than the value of the covered bonds (taking into account the face value and the net present value of the bonds). An issuer of covered bonds has to apply a valuation methodology that is confirmed by the Slovenian Institute of Auditors. Mortgage loans are eligible assets if they have a loan to value ratio (LTV) not exceeding 60%.

The issuer of covered bonds has to establish and keep an asset pool register. The special asset pool is monitored and supervised by the trustee of the asset pool register, who is an independent person licensed by the BSI. It has to ensure that the prescribed cover for the covered bonds exists at all times and that the cover assets are recorded correctly in the asset pool register.

The risk weighting of covered bonds is regulated in the BSI's regulations and is in line with Basel II and the Capital Requirements Directive. Risk weight is assigned to exposures in the form of covered bonds with regard to the risk weight of the issuer. Typically, a 10% risk weight may be applied to covered bonds issued by the issuer whose exposures are weighted at 20%.

Covered bonds are on-balance sheet transactions and the asset pool is regarded as a part of the issuer's assets as long as the issuer is solvent. In case of the insolvency of the issuer, cover assets are segregated from the issuer's other assets that form a bankruptcy estate.

Covered bonds do not automatically become due when the issuer becomes insolvent, but will be repaid at the time of their maturity. If cover assets are not sufficient for further uninterrupted repayment, a receiver of the asset pool shall liquidate the assets and distribute the liquidation proceeds to the bondholders to satisfy their claims. A receiver may also transfer the entire asset pool to another issuer.

Covered bonds are full-recourse obligations of the issuer. If the asset pool does not cover all relevant claims, holders of the covered bonds claim the shortfall to be repaid from the assets of the issuer's bankrupt estate. In this case, bondholders will rank equally with other unsecured creditors of the issuer.

Matija Repolusk

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