Covered Bonds are bonds issued by Banks characterised primarily by the presence of two forms of guarantee: on the one hand, the assets of the issuing Bank under section 2740 of the civil code, on the other, cash flows generated by a top quality loan book transferred to a Special Purpose Vehicle.
The presence of two guarantees considerably decreases the degree of risk inherent in these securities, making them particularly attractive to investors with strong risk aversion. The lower level of risk also reflects a lower return. Issuing Covered Bonds is thus beneficial for Banks, which can use these instruments to differentiate their funding sources while cutting funding costs.
Covered Bonds have been common on the European market for some time, and were introduced in Italy by the Ministry of Economics and Financevia Decree no. 310 of 14 December 2006 as part of the wider-ranging regulatory framework covering the securitisation of loans (Law no. 130 of 30.04.1999 as subsequently amended).
Qualifying assets transferred against the issuing of Covered Bonds must meet specific quality requirements and must fall within the categories identified under art. 2 of the afore-mentioned Decree (i.e. mortgage loans with a restricted ratio of loan amount to the value of the property used as collateral, loans to Public Administration, securities issued as part of securitisations involving the afore-mentioned loans).
The Supervisory Provisions issued by the Bank of Italy on 17 December 2013 (circular no. 285), as last amended (24 June 2014), also allow for covered bonds to be issued by banks belonging to banking groups which, at issuance, meet the following requirements:
- Own funds for no less than EUR 250 mln
- Consolidated total capital ratio not lower than 9%
Upon transfer, these requirements should also be met by transferors, if other than the issuing banks and not belonging to the same banking group (failure to meet these requirements prevents them from any further covered bond issuance, even under an already approved programme or as part of the cover pool still available).
The asset transfer is carried out according to thresholds expressed as a percentage of qualifying assets (25%, 60% and 100%) with respect to the total for similar transactions performed, staggered as a function of capital requirements (Tier 1 and Common Equity Tier 1). The capital requirements (T1 and CET1 ratios) set for each "range" should be jointly met; otherwise, the requirement for the lower range shall apply.
In 2008, Banca Carige S.p.A. launched a covered bond issuance programme via the special-purpose vehicle Carige Covered Bond S.r.l. Apart from Banca Carige S.p.A., other bank originators include Banca Carige Italia S.p.A. (merged by absorption into the Parent Company, effective 19 December 2016), Banca del Monte di Lucca S.p.A., Cassa di Risparmio di Carrara S.p.A. (merged by absorption into the Parent Company, effective 14 Dicember 2015) and Cassa di Risparmio di Savona S.p.A. (merged by absorption into the Parent Company, effective 23 November 2015), banks belonging to the Banca Carige Group.
As part of the Programme, Banca Carige S.p.A. completed over 20 issues, for an aggregate amount exceeding EUR 4,800 mln.