The much anticipated Pfandbrief legislation has been published by the Department of Finance in the form of the Asset Covered Securities Bill 2001, and contains features that make the Bill the most innovative yet in the Euro zone.
The Government said in the explanatory memorandum that the purpose of the Bill is ‘to create a legal framework for the issue of credit enhanced asset backed bonds by Irish mortgage and public sector lenders. It is intended to enable Irish lenders to finance their activities as efficiently as their European counterparts and to further develop the Irish capital markets and the IFSC.’
The Minister for Finance, Charlie McCreevy, said that ‘mortgage and public credit covered securities are now becoming a standard feature of European markets… they offer financial institutions the prospect of raising funds in a cost-effective manner, and as a consequence, they can have a substantial and beneficial impact on competitiveness.’
As the Irish mortgage market is relatively small, being worth only around E30 billion, local issuance volumes will initially be small. However, Ireland could yet prove to be a competitive force in the Euro covered bond market. A recent report published by Barclays Capital in Frankfurt advised, ‘Given the relative tax advantages of Ireland relative to say, Germany and Luxembourg, the Irish market may indeed have a competitive advantage over its
competitors already’.
Another advantage that the Irish covered bond market may have is the fact that it has a common law legal system, unlike its civil law counterparts. This would make it more attractive to US, UK and Asian investors.
Allied to this regulatory strength, are the innovative features of the Bill. These include specific interest rate management requirements; express powers to enter into hedging contracts to manage risk, tiered regulatory protection for investors; and clear provisions on what must happen in the event of an institution getting into financial difficulties.
While innovative, the Bill is still conservative in manner. Drawing largely on precedent from Bills enacted in other Euro zone nations, the Irish Bill does not allow assets from as wide a geographical area as that stipulated in the Luxembourg bill. Asset pools may only be drawn from other EEA countries, Switzerland, G7 countries and OECD countries that meet certain conditions.
This is one of the key features of the new product - the enhanced security it offers to the holders of the securities. In addition to strict supervision of the geographical locations from which the asset pools are drawn, investors will have preferential right in the case of bankruptcy. In the event of insolvency, the cover assets must be used first to meet the claims of the holders of the securities.
The Bill will be considered when the Dail recommences, and it is expected to be enacted with minimal revision. In the Autumn Finance and its sister publication Finance Dublin will run an indepth seminar on the subject. |