Banji Adenusi As debt securities issued by governments, government agencies, and corporations, bonds are an external source of funding for the expansion of an issuer's business (as in the case of corporate bonds), or for the development of infrastructure projects. In recent times, the primary market for corporate bonds in Nigeria has witnessed tremendous growth, as the number of corporate bonds listed on the Nigerian Stock Exchange has risen to a respectable 18 as of January 2013. While the issuance of government bonds and corporate bonds is regulated by the Nigerian Securities and Exchange Commission (SEC), the incidence of covered bonds is altogether a different proposition, as applicable legislation in this regard is non-existent. The United States Federal Deposit Insurance Corporation describes covered bonds as "general, non-deposit obligation bonds of the issuing bank secured by a pledge of loans that remain on the bank's balance sheet". Essentially, the defining feature of covered bonds is the duality of protection offered to investors, namely: (a) liability of issuer (typically a financial institution) for repayment; and (b) the special pool of collateral, also known as cover pool, on which investors have a preferential claim in the event of the issuer's insolvency. Typically, these collaterals are by way of high-grade mortgages or loans to the public sector or shipping loans. When contrasted with asset-backed securities (ABS), the cover pool becomes credit enhancement leverage, as they are more dynamic in the sense that assets can be added or replaced in the pool over time, especially where the value of these assets diminish or an early repayment has occurred. In addition, the credit risk stays with the issuer, as the borrower continues to absorb the risk of default and prepayment risk of the pool; much unlike ABS where the issuer does not absorb the risk of default beyond the agreed credit support and risk of prepayment is usually transferred to the investor. Herein lies the major difference between covered bonds and securitisation in general.
February 20 2013
