On 3 August 2012, the Belgian Parliament adopted long-awaited legislation on covered bonds (the "Covered Bonds Act")[1] as well as an act on the use of receivables for financing purposes (the "Mobilisation Act").[2] The new legislation is intended to level the playing field for Belgian credit institutions, compared to those in other EU countries, and facilitate the refinancing of credit institutions, whilst defining appropriate legal mechanisms to protect the holders of covered bonds.
The Covered Bonds Act provides a statutory framework for the licensing and supervision of the issuers of covered bonds, defines the rules applicable to the assets used to back the bonds, and provides for referential treatment for the holders of Belgian covered bonds, while the Mobilisation Act resolves a number of important issues - most of which are specific to Belgian law - related to the use of receivables for financing purposes.
1. Covered Bonds
Covered bonds are typically issued by banks and backed by certain assets (such as mortgage loans or public sector loans). Even if the performance of the underlying asset is insufficient, the issuer (or originator) must still repay the bond in full, which makes this product attractive to both investors (who benefit from high-quality debt) and issuers (which benefit from stable, low-cost financing) alike.
Belgian covered bonds - "on balance sheet" structure
The Covered Bonds Act adopts a fully “on balance sheet” approach (as is the case in Germany and France), without the use of a special purpose issuing vehicle: the assets covering the bonds are segregated on the originator's balance sheet. The Covered Bonds Act, however, also allows a credit institution to transfer eligible assets to another dedicated credit institution (either a subsidiary or an unrelated party), which in turn issues the covered bonds.
Belgian covered bonds may only be issued by a credit institution that is established in Belgium. The prior authorisation of the competent supervisory authority, namely the National Bank of Belgium ("NBB"), is required in order for a credit institution to become an issuer of Belgian covered bonds and for each issuance of such bonds. Once licensed, the issuer and each issuance of covered bonds are included on lists posted on the NBB's website. In order to be authorised by the NBB, the credit institution must demonstrate that it is able to issue and manage Belgian covered bonds, in terms of strategy, liquidity, organisation, management, audit and reporting of the assets. In addition, on the occasion of each new issuance, information must be provided to the NBB on the impact of the issuance on the originator's liquidity, financial situation and solvency.
Belgian covered bonds are officially known as Belgische covered bonds or covered bonds belge whilst CDR-compliant Belgian covered bonds are termed Belgische pandbrieven or lettres de gage belges.
Eligible assets (cover pool)
The assets that can be used to back covered bonds include (i) residential and commercial mortgage loans; (ii) loans to - or secured by - public authorities or public entities in OECD countries and multinational organisations; (iii) shares in securitisation vehicles investing mainly in mortgages or public sector loans; (iv) loans to credit institutions; and (v) derivatives relating to Belgian covered bonds or eligible assets. The cover pool can include assets in each of these categories.
The cover pool is subject to further requirements, however, and a royal decree specifying eligibility and valuation criteria is currently being finalised.
Ring-fencing of the cover pool: 'general estate'[3] versus 'special estate(s)'[4]
The Covered Bonds Act provides for ring-fencing of the cover pool, by separating the originator's assets and liabilities into a so-called general estate and one or more special estates. Each special estate includes the eligible assets allocated to a specific issuance of Belgian covered bonds, while the general estate includes all assets not allocated to a special estate.
The holders of Belgian covered bonds (and other creditors linked to an issuance of Belgian covered bonds, e.g. a swap counterparty) have, by operation of law, recourse to the assets in the relevant special estate. They also have a right of recourse against the general estate. Conversely, the originator's other creditors only have a right of recourse against the general estate, as long as the holders of the Belgian covered bonds have not been repaid in full.
Special estates are created by recording the eligible assets in a special register held by the originator. The Covered Bonds Act specifies that the allocation of an asset to a special estate is enforceable against third parties as from recordation of the asset in the register (provided recordation precedes the opening of liquidation) and covers by operation of law all registered assets as well as all related security interests (in rem or in personam) and proceeds from realisation of the assets.
Management and supervision of the cover pool
Every credit institution that issues Belgian covered bonds is required to make arrangements for proper management of the special estates of assets and perform a two-fold test of the cover pool. Firstly, the eligible assets are subject to a coverage test, meaning the special estate must have at all times a value in excess of the nominal value of the covered bonds and be sufficient to repay the principal, interest and related costs. Secondly, the assets are subject to a liquidity test - to be further detailed in a royal decree - whereby the special estate must generate sufficient liquidity (or have sufficient liquid assets) to allow the originator to make the payments owed under the covered bonds for a certain period of time.
In addition, various parties ensure specific management or supervision of the cover pool:
- cover pool monitor: the originator must appoint a cover pool monitor for each issue of Belgian covered bonds. The cover pool monitor is selected from the NBB's list of certified auditors. The monitor's role is mainly to verify compliance with the statutory and regulatory requirements applicable to the cover pool and report to the NBB;
- Belgian covered bond holders representative: the terms and conditions of Belgian covered bonds will usually provide for the appointment of a person to represent the bondholders. The representative's decisions are binding on the bondholders, within the limits of the representative's powers;
- portfolio manager: in certain cases of distress (e.g. mismanagement or liquidation of the originator), the NBB may appoint a portfolio manager with full authority to manage the special estate(s) in order to ensure that the credit institution fulfils all of its obligations to the bondholders. The portfolio manager has the right to sell some or all of the eligible assets.
Insolvency proceedings affecting the issuer
If the issuing credit institution becomes subject to liquidation, the Covered Bonds Act provides for protection of the special estate(s). In particular:
- liquidation concerns only the general estate, while the special estate(s) remain unaffected, unless the portfolio manager (in consultation with the security agent and with the NBB's prior consent) is of the opinion that the special estate is not sufficient to repay the holders of Belgian covered bonds or if 2/3 of the bondholders vote to liquidate the special estate;
- the credit institution's creditors (other than the holders of Belgian covered bonds) have no right of recourse against the special estate(s);
- proceeds on the loans backing the bonds which are received or collected after the start of liquidation are by law excluded from the general estate in bankruptcy and must be remitted to the portfolio manager;
- in the case of liquidation proceedings affecting a special estate, the holders of Belgian covered bonds have a preferential right to the proceeds from the eligible assets; if these assets are not sufficient, the bondholders have a right of recourse against the issuing credit institution's general estate of assets.
2. Use of receivables for financing purposes
In addition to the Covered Bonds Act, the Mobilisation Act resolves various issues that made the use for financing purpose (assignment or pledge) of loans held by Belgian credit institutions difficult or unattractive.
- The Mobilisation Act aims to facilitate the assignment of loans. It should be noted that: the assignment by or to a credit institution, financial establishment or securitisation vehicle of loans on public authorities is no longer subject to the stringent rules set forth in the Public Procurement Act of 23 December 1993. The assignment must still be notified, however, no later than the time the request for payment is made to the public authority;
- as a general rule, in the event of an assignment of a loan by or to a credit institution, financial establishment or securitisation vehicle, the debtor may no longer rely on the rules on the statutory or contractual set-off of claims or the exceptio non adimplenti contractus (i) as from the time the debtor is notified of the assignment, notwithstanding a close connection between the claims, if the conditions for set-off or the exception non adimpleti contractus are met after the notification date (subject to certain exceptions) or (ii) in the absence of an assignment and notwithstanding a close connection between the claims, if the conditions for set-off or the exception non adimpleti contractus are met after the date of the insolvency proceedings affecting the assignor (subject to certain exceptions);
- the assignment of mortgage loans by or to a credit institution, financial establishment or securitisation vehicle is no longer subject to the stringent rule that requires the execution of a notarial instrument and the recordation of the assignment in the mortgage register, giving rise to a 1% registration duty;
- mortgage loans incorporated in a title payable to order or to bearer may be assigned without the endorsement or delivery of the relevant title to the assignee being required;
- agreements ranking mortgage loans are automatically enforceable against third parties.
3. Conclusion
The Covered Bonds Act provides Belgian credit institutions with a new possibility to use loans to obtain stable financing at attractive conditions. Moreover, the Covered Bonds Act and the Mobilisation Act extend the possibility to use loans in other asset-based financing transactions, thereby enhancing access by credit institutions to refinancing sources.
Further, without prejudice to Eurosystem's authority to decide what collateral and which counterparties are eligible for its monetary policy operations, the Covered Bonds Act and Mobilisation Act improve the liquidity of loan portfolios and should facilitate access to Eurosystem's collateralised funding.
By adopting this legislation, the Belgian Parliament has closed a gap compared to other EU states, notably neighbouring countries such as France, the Netherlands, Germany, Luxembourg and the United Kingdom, in the area of covered bonds and the use for financing purposes of loans extended by credit institutions.
