Co-published Covered bonds guide: Norway


buffer should be sufficient to cover net refinancing needs and all other costs for a period of six months. Although the final draft does not contain a specific requirement these discussions give a good indication as to what would be considered a minimum prudent liquidity buffer. The issuer must rectify any failure of the


credit quality requirements under the relevant act or regulation and, depending upon the circumstances, notify the Norwegian Financial Supervisory Authority (FSAN) about such a failure. The independent inspectors must also inform the FSAN if they have cause to believe that the requirements concerning the cover pool have not been met. The FSAN may order the issuer to take necessary actions, and failure to comply with such orders can result in fines. The net present value test and the interest


coverage test require that the issuer takes steps to mitigate market risk from changes in interest rates or currency movements. In Norway, this is accomplished by including derivatives hedging agreements in the cover pool. The SCBI can enter into derivatives agreements with clearing houses and credit institutions within the EEA or the OECD with a sufficient credit rating.


Rights to the cover pool Holders of covered bonds and counterparties to derivative agreements have an exclusive, equal and proportional (pro rata) preferential claim over the cover pool assigned to them. The preferential claim afforded to the covered bonds and the derivative agreement counterparties in the event of the issuer’s bankruptcy ranks ahead of several other claims that would otherwise have priority in a bankruptcy. Priority rights will apply similarly in respect of any over-collateralisation that has been duly registered in the cover pool in accordance with the requirements for inclusion in the cover pool.


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Cover pool organisation The issuer is required to maintain a register of issued covered bonds and of all the assets in the cover pool securing the covered bonds. The registration of an asset does not have an


There are no requirements for mandatory over- collateralisation in Norway


automatic affirmative legal effect, but any party alleging that an asset is wrongfully placed in the cover pool, will carry the burden of doubt. If it is evident beyond doubt that an asset has been wrongfully entered into the register, the asset will not form part of the cover pool. The recommendations on transparency


standards published by the International Capital Markets Association (ICMA) Covered Bond Investor Council have been endorsed by the Norwegian Covered Bond Council and a Norwegian template for transparency standards has been published.


The independent inspector The issuer is required to have an appointed independent inspector. The principal tasks of the independent inspector are to monitor that the cover pool register is maintained in accordance with regulatory requirements, and also to monitor that the cover pool meets the net present value test requirements. Inspections are carried out at least every three months. In addition to appointing the independent inspector, the FSAN has the statutory authority to supervise the activities of the issuer in the same way as any other financial institution in Norway.


Issuer default In the event that an issuer is declared bankrupt, a bankruptcy administrator will be appointed by the court. The bankruptcy administrator will ensure the proper management of the cover pool in accordance with the regulation, including timely payments to covered bond holders. Bankruptcy, creditor negotiations or public administration of the issuer are not by themselves sufficient to give the covered bond holders the right to accelerate the covered bonds. Only a failure to pay would give the covered bond holders the right to declare a default. The FSAN does not have any responsibility


to act itself as service provider or administrator of last resort. However, the FSAN will likely take all the steps that will be considered necessary to ensure that the issuer and the cover pool are properly administered. Following the default of the sponsor bank


or the issuer, the main sources of liquidity risk are from the mismatch of mortgage payments and interest payments on the covered bonds, and a mismatch between the mortgages and the repayment of the principal on the covered bonds. Most covered bonds are bullet bonds, however in Norway they usually have a soft bullet structure so that the issuer may extend the maturity of the covered bond if it is unable to repay the principal when due.


In the event that payments from the cover


pool following issuer default cannot be made to the holders of covered bonds in a timely manner, or this situation is impending, the bankruptcy administrator must halt all payments from the cover pool and as soon as possible notify the covered bond holders of the situation. Following the halt in payments, the further administration of the cover pool will follow the general Norwegian rules for bankruptcy. It is not necessary for covered bond holders


or derivatives counterparties to register any claims following issuer default. The cover pool register which is kept by the issuer showing the assets and liabilities in the cover pool is sufficient evidence as to the claims of the covered bond holders and the derivative counterparties.


PART II – RECENT DEVELOPMENTS IN NORWEGIAN COVERED BOND LEGISLATION


Changes to the Covered Bond Regulation in 2013 There has been some uncertainty in the Norwegian market whether holiday homes should be considered as residential property with a maximum allowable LTV of 75% or as “other real estate” with a maximum LTV of 60%. An early draft of the Norwegian covered bond regulation contained a reference that would have clarified that holiday homes are to be considered as residential property, however, the final version of the regulation was ambiguous. The higher volatility of the value of holiday homes compared with permanent residences is an argument for stricter LTV requirements, however holiday homes are treated differently in different jurisdictions. Danish legislation has chosen to specifically include holiday homes with the stricter LTV requirements for commercial real estate, however, in Sweden holiday homes are subject to the same rules as residential real estate. Following changes that took effect as of January 1 2013 the regulation now specifies that holiday homes are to be considered as “other real estate” subject to the 60% LTV requirement. A deadline of January 1 2016 has been given for the removal from cover pools of holiday home mortgages that had a higher LTV ratio than 60% at the time they were transferred to the cover pool.


Review of the Covered Bond Legislation The Norwegian ministry of finance recently requested opinions from the FSAN and the Norwegian central bank (Norges Bank) regarding:


IFLR/July/August 2013 63


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