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Structured covered bonds: The long arm of the law

How structured covered bonds have overtaken Europe and the US

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site

Basel II may have cast a pall over the securitization market, but in its shadow covered bonds are undergoing a remarkable growth.

At the close of 2006, global issue volume for the year stood just shy of €180 billion. Predictions of a market slowdown this year could also prove rash, with banks lining up to issue across Europe. And covered bonds are making waves in the US. Washington Mutual became the first US issuer in September last year.

Volume alone has not been the sole distinction of the covered bond market.

Acutely aware of growing investor appetite for the bonds, European issuers are beginning to break free of the legislative frameworks which originally produced the product, and are developing their own innovative structured covered bonds.

Special treatment Covered bonds are the only financial instrument to enjoy special status in EU law. The Undertakings for Collective Investments in Transferable Securities (Ucits) Directive laid the foundations for the legislative covered bond model in 1988.

A covered bond is essentially a secured debt instrument. Highly rated, covered bonds have a preference claim to the issuers assets – ring fenced in a special cover pool – which is guaranteed by law.

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