On 3 August 2012 Belgium enacted a law creating a legal framework for Belgian covered bonds (the “law”), thus joining the numerous European States that have already legislated on the matter. On 17 October 2012, two royal decrees were issued to implement the new law.
Covered bonds are bonds issued by a credit institution covered by security consisting of a pool of collateral, granting investors a claim against (i) the issuing institution in the first instance and (ii), in the event of failure of the latter, a priority claim on the cover pool.
The law introduces a complete “on balance sheet” system without the need for a special purpose issuing vehicle: the assets covering the bonds are ring-fenced on the issuer’s balance sheet and dedicated by law to secure the related bonds. Belgian covered bonds may only be issued by a credit institution that is established in Belgium and that has been authorised in advance by the National Bank of Belgium to issue Belgian covered bonds and for each issuance of such bonds, which are officially called “Belgische covered bonds” or “covered bonds belges”.
The assets that can be used as collateral for covered bonds include (a) residential and commercial mortgage loans on properties situated in a Member State of the European Economic Area; (b) loans to — or secured by — public authorities or public entities in OECD countries and international organisations; (c) shares in securitisation vehicles investing mainly in mortgages or public sector loans in the same categories as (a) and (b) above; (d) loans to credit institutions in OECD countries; and (e) derivatives relating to Belgian covered bonds or eligible assets. The cover pool can include assets in each of these categories, but at least 85 per cent of the nominal amount of the covered bonds must be covered by assets of categories (a) and (b) above. The value of the asset pool must always cover at least 105 per cent of the nominal value of the covered bonds.
The law provides for ring-fencing of the cover pool, by separating the issuer’s assets and liabilities into a general estate and one or more special estates. Each special estate includes the eligible assets allocated to a specific Belgian covered bonds issue, while the general estate includes all assets not allocated to a special estate.
Belgian covered bonds entitle holders (and other creditors linked to an issuance of Belgian covered bonds, e.g. a swap counterparty) to claim against the assets in the relevant special estate. They are also entitled to claim against the general estate. The issuer’s other creditors, however, only have a claim against the general estate, as long as the Belgian covered bonds holders have not been fully reimbursed.
The new law will allow Belgian credit institutions to use the loans on their books to obtain financing at reasonable conditions and will enable Belgium to catch up with other EU states, such as its neighbours France, the Netherlands, Germany, Luxembourg and the United Kingdom, in the area of covered bonds.