Covered bonds | Practical Law

Covered bonds | Practical Law

Covered bonds

Covered bonds

Practical Law ANZ Glossary w-016-0163 (Approx. 3 pages)

Glossary

Covered bonds

Bonds issued by ADIs and backed by a pool of high quality assets (the cover pool) such as residential mortgages.
Covered bonds are dual recourse bonds, which means that the bondholders have two mechanisms to recoup their investment:
  • First, the bondholders have recourse to the ADI.
  • Second, if the ADI does not meet its contractual obligations, the bondholders have recourse to the cover pool of assets. If the cover pool of assets is insufficient to satisfy the bondholders' claims, then the bondholders retain an unsecured, full recourse claim against the ADI's remaining, unsecured assets.
Accordingly, payments on the covered bond are guaranteed or "covered" by ring-fencing the assets backing the bonds from other assets of the ADI. In Australia, the cover pool of assets must be owned by a special purpose vehicle that guarantees the ADI's obligations under the covered bonds.
On the insolvency of an ADI, the covered pool of assets will not be available to the general creditors of the ADI (including depositors). However, covered bondholders will have recourse to both the ADI and the covered pool in those circumstances.
Covered bonds have a long history in Europe and the United Kingdom but was, until recently, prohibited in Australia under the Banking Act 1959 (Cth). In 2011, the Banking Act 1959 (Cth) was amended by The Banking Amendment (Covered Bonds) Act 2011 (Cth) to enable ADIs to issue covered bonds.
Covered bonds are similar to bonds issued under a securitisation, except that:
  • Under covered bonds, bondholders have recourse to both the pool of assets backing the bond and to the ADI (that is, the issuer of the bonds).
  • Under bonds issued under a securitisation, bondholders have recourse only to the assets backing the bonds.