8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Covered BoFINA538 Raising Debt in A

n

dssian Financial Markets

Presented by Group CAR:

Denise ODARO

Eddie CHAN

Kevin LAW

Max LIN

RIcke HOR

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Overview

What are Covered Bonds?

Advantages and Disadvanta

Financial Crisis and

Development of Covered Bo

Would Covered Bonds Take

in Asia Market?

Q & A

ges

ds

ff

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Whatare C vered Bonds?

Nature of Covered

Bonds

Popularity of Covered

Bonds

Standardized Structure

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Whatare C

A Corporate Bond w

recourse to a pool o

assets that secures

"covers" the bond

An enhancement o

top of unsecured

corporate bond

Most commonly forhome mortgages, a

public infrastructure

v

ered Bonds?

ith

r

n

nd

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Whatare C vered Bonds?

Very popular in

Europe

Created in Germanyin 1769

Second only to

government bonds

But not in other partsof the world

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Standardized struct

Today covered bond

address: What assets are eli

The minimum quali

assets, such as loa

The amount of asswhile the bonds ar

How the asset pool

How investors will

goes bankrupt

Whatare C

re:

laws in Europe typically

gible to back covered bonds

y requirements for those

n-to-value ratios

ts needed to cover the bondsoutstanding

will be monitored

e protected if the issuing bank

vered Bonds?

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Advantage & Disadvantage

How the Buyers areProtected?

What is the Risk (and

Return)?

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Advantages o

Similar to corporate b

with additional protecti

to buyer

Similar in many ways

asset-backed securiti

created in securitizati

But covered bonds ass

remain on the issuers

consolidated balance

sheet.

fCovered Bonds

nd

on

o

s

n

ts

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Advantages of Covered Bonds

Issuers must ensure that thepool consistently backs thecovered bonds.

Any deteriorating loans in

the cover pool must bereplaced with stronger ones.

In contrast to securitization,in which the buyers take therisk if the underlying assetpool went sour

Limited leverage of underlying

assets Loan-to-value ratio usually

60% - 75%

Standardize and Qualification ofasset an important filter

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Advantages o

Separate Register holdscovered assets

Dual control of registeredassets

Separate audit process Standard framework

Limitation on variants, locosts and easier forinvestors to analyze andprice

Diversification Covered bonds allowconservative investors todiversify into mortgagesecurities without dilutingthe credit quality of theiroverall portfolios.

f Covered Bonds

er

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Disadvantages of Covered Bonds

Risk remain on theissuers book

No diversification and risk

transfer

Over-collateralizationreduces return

Standardization and

transparency usuallymeans low profitmargin for issuers anddealers.

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Covered Bond Development

Financial Crisis

Investor Behavior

Latest Development ofCovered Bonds

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Covered Bon

Securitization, such asmortgage-backed securiti(MBS) and Collateralizeddebt obligations (CDO)

became hugely popularduring the housing bubble.

When the housing marketcrashed in 2007/2008, theholder of MBS and CDOsuffered as the underlying

assets devalue. Investors avoid securitizatiproducts, which reduced tliquidity of mortgage andmake it become hard to g

s Development

s

one

t.

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Covered Bon s Development

On July 28, 2008, US

Treasury Secretary Henry

Paulson announced that,

along with four large USbanks, the Treasury would

attempt to kick-start a

market for these securities

in the U.S., primarily to

provide an alternative formof mortgage-backed

securities.

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Covered Bon

Quote One option we havelooked at extensively is coverbonds, which are a $3 trillionmarket used widely in Europemortgage funding. I believecovered bonds have the poteto increase mortgage financinimprove underwriting standarand strengthen U.S. financial

institutions by providing a nefunding source that will diverstheir overall portfolio.

s Development

d

for

tial,s,

fy

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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How would

fit in Asia M

overed bonds

rket?

Momentum & Needs inAsia

How would covered

bonds fit in?

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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How would

bonds fit in Corporations have difficulty to

raise fund

Liquidity remains thin afte

credit crisis Confidence on corporatio

remains weak

Securitization is unwelco

by cautious investors

Governments across the

world raise fund via

government bond to stimu

economic, which makes

corporate bond less attrac

Crowding-out effect

covered

Asia Market?

the

s

e

late

tive

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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How would

bonds fit in

covered

Asia Market? Natural fit in todays market

Higher-quality, less risk toattract cautious investors

Cheaper funding comparewith otherwise withoutcovered assets

Diversification of refinancingsources

covered bonds attract a

different group of investorswhich would otherwise notbuy bonds without backedasset

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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How would

bonds fit in Infrastructure

development in Asia

Huge capital

expenditures in Asia o

Infrastructure projects

Ideal candidate as poo

asset for covered bond

Corporations in Asiapreferred less levera

than their US

counterparties

covered

Asia Market?

l

s

e

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Q & A

Any questions?

8/9/2019 Raising Debt in Asian Financial Markets-Covered Bonds: By Denise ODARO, Eddie CHAN, Kevin LAW , Max LIN , RIcke HOR

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Tha k you!