Turkish covered bonds: a summary
Covered bonds are corporate debt instruments secured by cash flow mainly from mortgages or loans. They are similar in many ways to asset-backed securities in securitisation, but covered bond assets remain on the issuer’s balance sheet and therefore, as a major advantage to the investor, covered bonds continue to be the obligation of the issuer.
Turkish covered bonds are defined as capital markets instruments and known by law as covered securities, or covered bonds (“Teminatli Menkul Kiymetler”). Even though the Capital Markets Board of Turkey’s (CMB) Communique on Covered Bonds covers both asset- and mortgage-covered bonds, this article focuses only on “mortgage-covered bonds”, referred to as covered bonds throughout this article.
Who is the issuer and what is the issue limit?
Covered bonds may be issued by housing finance institutions (konut finansmani kuruluslari) which are mainly banks or mortgage finance institutions (ipotek finanmani kuruluslari). There is not an issue limit at the issuance stage, but the nominal value of the covered bonds in circulation/ trading at a given time and issued by non-mortgage finance institutions must not exceed 10% of the total assets of the issuer.
Corporate act on and regulatory approval
Shareholders resolution is required for the issuance of covered bonds. However, a board of directors are also allowed to resolve on issuing covered bonds if an explicit authority is given to that board of directors in the articles of associa- tion of the issuer.
The issuers are required to apply to the CMB for approval to issue covered bonds, and the CMB must also approve the Turkish prospectus (izahname) if the covered bonds are domestically offered in Turkey. The CMB is required to provide an issuance certificate (ihrac belgesi) in any case, i.e. either public offering or private placement to local or international investors. If the issuer is a bank, the consent of the Turkish banking authority, or the BRSA, must also be obtained before the approval of the issuance by the CMB.
Cover pool
Apart from the assets that the CMB may further determine, mainly the following assets meet the eligibility criteria to form the pool of cover assets (teminat varliklar):
Receivables of banks and finance corporations, arising from housing finance which have been secured by mortgage
Receivables arising from financial lease agreements entered into for housing finance
Mortgage secured receivables (or commercial loans) of the banks, financial leasing companies and finance corporations
Up to 15% of the net present value of the cover pool may be comprised of certain approved substitute assets which include among others cash and Turkish government bonds.
Derivative contracts
If derivative contracts are planned to be included in the cover pool, such contracts should not contain a unilateral termination clause by the swap counterparty. Unilateral termination is allowed only under certain conditions.
Protect ng 9investor interests
Turkish law provides protection to the investors in the event of issuer default and preserves the credit quality of the cover pool.
Cover pool monitor
It is mandatory for the issuer to appoint a cover pool monitor (teminat sorumlusu), which is selected among the independent audit companies that have the required CMB license to effectuate information systems audits in capital markets.
Level of over-collateralization
As mentioned below under the matching principles, the net present value of the cover pool must at all times be at least 2% more than the net present value of entire obligations under the covered bonds.
Segregation of cover pool: mitigatigatng commingling risk
Turkish covered bond issuers are obliged to maintain a cover register in book or electronic form, which will allow them to separately and privately record and observe the cover pool and the income generated from the cover pool, and to provide separate accounts or a platform to allow for the daily review of the registration of any entry.
No encumbrance over the cover pool
Until the covered bonds are completely redeemed, assets in the cover pool cannot be disposed of, pledged, designated as collateral, attached by third parties, including for the collection of taxes or other public receivables, nor can they be subject to injunctive decisions of courts or included in the bankruptcy estate of the issuer. These restrictions apply even if the management or the supervision of the issuer is transferred to public institutions.
Default scenario
In case of a partial or full default under the covered bonds, the cash flow generating from the cover pool is collected in a separate account of the issuer as of the default date and is used to repay due and payable obligations of the issuer against the investors. The cover pool monitor is obliged to supervise and inform the issuer about these actions and whether the cover pool meets all obligations. If the cover pool does not meet the obligations, investors can also recourse to the issuer’s other assets (ranking pari passu with unsecured creditors of the issuer) without waiting for collections under the cover pool.
Nom nal value match ng and cash flow match ng
The nominal value of the cover pool may not be less than the nominal value of the covered bonds. While calculating the nominal value, the balance of the principal amounts of the loans, the issuance price of the discounted debt instruments, and the nominal value of the premium debt instruments shall be taken into consideration. The sum of interest, revenue and similar income expected to be generated from the cover pool within one year following the calculation date shall not be less than the expected payment obligations under the covered bonds during the same period.