Co-published Covered bonds guide: Switzerland


the guarantor, the Swiss bank transfers a pool of mortgage loans, together with the related mortgage security, to the guarantor.


Accordingly, if the issuer defaulted under


the covered bonds and the guarantee was to be drawn, the guarantor could claim for coverage by the issuer under the guarantee mandate agreement. Failure by the issuer to pre-fund the payments lowered under the guarantee would allow the guarantor to enforce in the cover pool and to use the proceeds to satisfy its payment obligations under the guarantee. The cover assets mainly consist of Swiss


mortgage loans granted by the issuing bank to Swiss domestic individuals and the respective mortgage certificates securing such loans. Additionally, cash and other qualifying substitute assets may be part of the cover pool. To a considerable extent, Swiss structured


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covered bonds build on features developed in the context of English structured covered bonds. But the resulting structure is unique, driven by Swiss legal, regulatory, tax and insolvency law considerations. Furthermore, combining the requirements of issuing into the international market with the particularities of a cover pool consisting of Swiss mortgage assets, has led to a bifurcation of the governing law. Certain agreements essential for the functioning of the covered bond programme, such as the inter-creditor deed governing the priority of payments in relation to the proceeds of the cover pool, the cash management agreement regulating related aspects of managing the cash in the cover pool, and the guarantee deed according to which the guarantor guarantees the payment of principal and interest under the covered


Structure of Swiss structured covered bonds Trustee


Guarantee deed Guarantee payments


Guarantor


Cover pool


Covered bonds Principal/interest


Investors Proceeds


Mortgage claims


Non-Swiss branch


Swiss bank


Mortgage debtor


The avenue of structured covered bonds has only recently been explored in Switzerland


bonds, are governed by English law. English law also applies to the swap agreement needed for purposes of mitigating the interest rate risk resulting from the discrepancy between fixed coupons under the covered bonds and the interest rate structure of the mortgages in the cover pool, as well as the currency risk between Swiss franc mortgages in the cover pool and foreign currency obligations under the covered bonds. Also, the covered bonds and the relevant documentation (trust deed, agency agreement, and so on) are governed by English law. Conversely, the agreements governing the establishment of the cover pool and the relationship between the issuer and the guarantor are governed by Swiss law. Relevant agreements include the agreement under which the mortgage loans and the related mortgage certificates are transferred to the guarantor and into the cover pool. The same applies for the guarantee mandate agreement, according to which the issuer instructs the guarantor to issue a guarantee for the payment obligations under the covered bonds. The arrangement of structured covered


bonds mainly depends on the structure of the cover pool, and, in the case of a cover pool containing claims secured by residential mortgages, in particular on the documentation and the structure of the mortgage business of the issuer. Therefore, the following description focuses on the two programmes established by the two big Swiss banks, UBS and Credit Suisse.


Role of issuer The issuers of Swiss structured covered bond programmes, currently UBS and Credit Suisse, are large financial institutions subject to regulation, supervision and examination by FINMA and certain systemic oversight powers of the Swiss National Bank. Following the issuance, the main duty of


the issuer in relation to the covered bonds is to always maintain an appropriate level of eligible mortgage assets or substitute assets in the cover pool. The cover pool assets are legally owned


and held by the guarantor rather than by the issuer. The mortgages are, however, only transferred to the guarantor for security purposes and therefore remain on the issuer’s balance sheet.


Guarantor and guarantee The guarantor is a Swiss corporation, which is majority-owned by the relevant issuer with two independent board members, which are also minority shareholders. Under the constitutional document of the guarantor, the two independent


board


members/shareholders are granted a veto right in respect of all relevant decisions on a shareholder and board level. This corporate governance setup is designed to enhance the protection of the interests of the covered bond investors and the stability of the guarantor, in case of an insolvency of the issuer. The guarantor is structured as a


bankruptcy remote SPV with a limited corporate purpose. In essence, this purpose


IFLR/July/August 2013 69


Guarantee payments


Guarantee Mandate Agreement


Prefunding


Indemnity Security


Assignment


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