We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
25 May 2007
In December 2002 Parliament passed an amendment to the Financial Services Act 1988 allowing certain specialized financial institutions to issue bonds with a pledge over a portfolio of the issuer's loans. During the work on the detailed regulations to be issued pursuant to the new provisions of the act, it became obvious that certain changes to the new provisions were necessary. Therefore, Parliament passed further amendments to the covered bond legislation; it is expected that the new rules will come into force in the near future (hopefully before July 1). The Ministry of Finance is in the process of finalizing the draft regulations which will set out more detailed requirements with regard to covered bonds.
Pursuant to the new legislation, Norwegian mortgage credit institutions will be able to issue bonds with preferential rights to all assets placed in the cover pool of the credit institution.
Norwegian banks may not issue covered bonds. Typical assets that may form part of a cover pool include:
Mortgage credit institutions will have to comply with loan-to-value and risk classification requirements with respect to the various categories of assets that may be included in a cover pool.
The new legislation also sets out asset coverage and liquidity requirements. The general asset coverage requirement is that the value of the cover pool shall at all times exceed the value of the covered bonds with preferential rights in that pool. There is no statutory requirement for over-collateralization; however, some over-collateralization will be required pursuant to the asset-matching requirement. Pursuant to the liquidity requirement, mortgage credit institutions shall ensure that payment flows from the cover pool enable the institution to honour its payment obligations towards holders of covered bonds and counterparties to the derivative contracts that are entered into with respect to the cover pool at any times. Mortgage credit institutions shall establish a liquidity reserve to be included in the cover pool as substitute collateral.
Mortgage credit institutions shall also maintain a register of covered bonds issued and the cover assets assigned thereto, including derivative contracts. The register shall at all times contain information on the value of the bonds in the cover pool. The regulations to be issued by the ministry will set out in detail the requirements for the register. The Financial Supervisory Authority shall appoint an independent inspector who must check that the requirements concerning the cover pool and the register are met at least every third month. The independent inspector shall report to the authority at least annually and notify the authority if he or she considers that the requirements are not satisfied.
Assets included in the cover pool may not be pledged or subject to execution, attachment or other enforcement proceedings in favour of certain creditors of the mortgage credit institution. Similarly, rights of set-off or retention, among others, may not be agreed or declared in an asset included in the cover pool. The draft regulations provide for certain exceptions from the set-off prohibition in respect of derivative contracts that form part of the cover pool.
In the event of bankruptcy of an issuer of covered bonds, the general rules under the bankruptcy legislation will apply, except as otherwise provided in the new legislation. The bankruptcy administrator appointed by the court in the event of an issuer's bankruptcy shall ensure that timely payments are made on covered bonds and derivative contracts, provided that the cover pool complies with the statutory requirements. If and when timely payment can no longer be made, the bankruptcy administrator shall inform the holders of covered bonds and derivative counterparties and set a date for cessation of payments.
In the event of bankruptcy of an issuer of covered bonds, the holders of covered bonds and the derivative counterparties shall have an exclusive, equal and pro rata preferential claim over the cover pool assigned to them. These preferential rights will rank ahead of all other priority rights set out in the Norwegian bankruptcy legislation; however, certain statutory liens in favour of the bankruptcy estate will rank ahead of the covered bonds and the derivative counterparties.
If, in the event of an issuer's bankruptcy, a cessation of payment is declared by the bankruptcy administrator, all claims that have a preferential right in the cover pool shall be calculated on the date of cessation of payments. Interest and foreign exchange contracts shall be fixed at market value on the basis of the pricing of comparable interest rates and foreign exchange contracts. In respect of bond issues, the holders of covered bonds will be entitled to settlement of all accrued interest and charges, as well as agreed future cash flow (principal and interest) up to the ordinary maturity date, discounted at the market rate for comparable bonds under the relevant currency.
Several Norwegian financial institutions are preparing to use this new funding source. Potential issuers are first and foremost looking to issue covered bonds with residential mortgage loans in the cover pool.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.