Moody’s: Covered bonds offer viable funding option in South Asia and ASEAN

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JAKARTA – Moody’s Investors Service says that covered bonds could provide a viable option for financial institutions in South Asia and ASEAN to diversify their funding sources, even in the absence of specific legal and regulatory frameworks for covered bonds.

“The absence of specific legal frameworks for covered bonds does not pose an impediment to the issuance of covered bonds in South Asian and ASEAN markets, as long as the existing legal framework allows for the issuance of contract-based covered bonds containing key credit protections,” says Joe Wong, a Moody’s Vice President and Senior Analyst.

Wong was speaking on Moody’s just-released report titled “Covered Bonds – South Asia and ASEAN: Covered Bonds Offer Viable Funding Option, Even in the Absence of Legal Frameworks”.

Moody’s report says that banks and non-bank financial institutions in South Asia and ASEAN could use covered bonds to manage the costs of longer-term funding used to match long-dated assets.

The principal credit strength of covered bonds – the dual recourse to the issuer and the assets backing the covered bonds which are segregated from the issuer for the benefit of bondholders when the issuer is in default – can be achieved in certain markets even if there is no explicit covered bond legal framework in place.

In common law countries such as India (Baa3 positive) and Malaysia (A3 stable), the segregation of the cover pool can be achieved through a legal transfer of the cover pool assets to a bankruptcy-remote special purpose vehicle, which guarantees in turn the covered bond issuer’s payment obligations.

Dual recourse can be achieved through combining the issuer’s primary obligation as debtor under the bonds, with a guarantee from the special purpose vehicle as owner of the cover pool assets. If the issuer defaults, the guarantor will be liable to make payments on the bonds and the cover pool can be isolated from the issuer’s insolvency estate.

Potential covered bond issuers include financial institutions with sizable asset portfolios – such as residential mortgages – because these assets can be used for covered bonds.

“Loan-to-deposit ratios have generally been rising for banks in South Asia and ASEAN, even though economic and credit growth in these regions have slowed in recent years,” says Alka Anbarasu, a Moody’s Vice President and Senior Analyst.

“Covered bonds could help diversify the banks’ funding sources and maturity profiles, particularly in cases where loan growth exceeds deposit growth by a modest margin,” adds Anbarasu.

Covered bonds can be used as an alternative funding option for financial institutions, because they offer a low- cost stable market funding channel; helping financial institutions to diversify their investor base, and better match their funding to longer-term assets.

Because of their dual recourse nature, covered bonds are associated with lower credit risk when compared with unsecured debt, and generally achieve tighter spreads than unsecured funding sources in Asia and globally. Historically, covered bond markets have remained open in periods of crisis when other funding sources have been constrained. (*)

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Source: The Insiderstories
Moody’s: Covered bonds offer viable funding option in South Asia and ASEAN

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