Fitch: Singapore one step closer to a covered bond market

[SINGAPORE] Amendments proposed by the Monetary Authority of Singapore (MAS) to rules governing the issuance of covered bonds put Singapore one step closer to an active covered bond market which Fitch Ratings expects to open as early as mid-2015. The changes, as detailed in an MAS consultation paper, will provide greater flexibility to covered bond structures. It further clarifies regulations including how assets can be segregated, the limit on liquid assets, and the calculation of the loan-to-value (LTV) ratio for mortgage assets.

Updated rules on the segregation of assets will allow the covered bond issuing banks to hold assets on balance sheet under a declaration of trust. This addresses a technical issue of payment ranking rights for mortgage recoveries, and will ensure covered bond holders have first ranking security over defaulting loan recoveries.

The MAS requirement remains for an issuer to provide legal confirmation of the ringfencing of assets, whether via an SPV or through declaration of trust.

The MAS proposal to amend the rules regarding the 15 per cent limit on liquid assets by allowing cash and equivalents up to 12 months of payment obligations in a covered bond programme, if enacted, will better enable programmes to manage liquidity levels where maturing covered bonds come due. This would also be the case where there is a time lag for when mortgage assets can be substituted into the cover pool.

This is especially true for the issuance of hard-bullet covered bonds, where there is no grace period to liquidate assets as part of the terms of the bonds. In some cases, a pre-maturity test is used to trigger the collateralisation of bonds maturing in the coming 12 months. The proposed rules will give programmes that issue hard-bullet bonds the ability to hold cash assets in excess of the 15 per cent limit to fund such maturing covered bonds.

Rules governing the 80 per cent LTV limit for residential mortgages are also proposed to be tightened to specify that the limit applies at the point of inclusion of the loans into the cover pool. This means that loans with a current LTV above 80 per cent due to changing property or loan values will not be removed from the portfolio. In addition, the portion above 80 per cent for loans in such a situation, will not be counted towards the minimum overcollateralisation requirement. Notably, all of these loans, including those in excess of the limit, must still be calculated for the purpose of the 4 per cent encumbrance limit on the proportion of total bank assets that can be pledged to covered bonds.

Source: Fitch