ABN Amro has opened up yet another covered bond market with its A25 billion Dutch structured covered bond programme, which kicked off last month with a €2 billion issue.
Although the Dutch arguably issued the world's first structured covered bonds through the Bouwfonds vehicle, these did not achieve the degree of separation between the issuer rating and the bond rating that has been possible in the UK. "With Bouwfonds, you just took the underlying issue, threw in some collateral, and got a two-notch upgrade," says Evertjan Manuels, vice-president, group ALM, for ABN Amro.
To improve on this, ABN modified the UK structure. Without a Dutch covered bond law, ABN needed a special purpose vehicle. This is bankruptcy-remote and its only creditors are covered bondholders. But ABN uses its SPV differently. "UK covered bonds use securitization techniques, but securitization and covered bonds are different," says Clifford Chance's Kees Westermann, who led the legal team advising ABN Amro. "If you were playing football, in a securitization the SPV would play in central midfield, with all the proceeds channelled through it."
In ABN's bond, by contrast, the issuer does not depend on the cashflows from the SPV to service its needs. The SPV guarantees ABN's issue and sits on a pool of assets, which it can call on if ABN cannot service its deals. "If ABN isn't playing well, the SPV is a substitute," says Westermannn.
Law firm Clifford Chance devised a new contract, the guarantee support agreement (GSA), which dispenses with many of the synthetic cashflows used in UK covered bonds. Westermann says that UK issuers have expressed an interest in the new structure. All the major rating agencies have rated the structure AAA.
Clifford Chance also used legislation and case law to persuade the rating agencies that issuers can achieve a true sale of Dutch all-monies mortgages.