Co-published Covered bonds guide: Switzerland “ 70 IFLR/July/August 2013


consists in holding and, if necessary enforcing the assets in the cover pool. Therefore, the guarantor may only enter into such agreements and transactions as are necessary to effectively perform its function under the covered bond programme. Moreover, it benefits from non-petition and limited recourse provisions, to which substantially all parties to the transactions have acceded with a view to reinforce the bankruptcy remoteness of the guarantor. There are a number of trigger events as described in the guarantee deed following which the guarantee is activated. Such trigger events include: (i) failure by the issuer to pay any interest or principal amount when due; (ii) bankruptcy or insolvency proceedings being ordered by a court or authority against


Extension of the guarantee to a new issuance is subject to the security assignment of an adequate amount of additional eligible mortgage claims, and the passing on of the legal title in the related mortgage certificates to the guarantor by the issuer (as well certain other conditions). For Swiss regulatory and tax reasons, however, the mortgage claims in the cover pool only secure the indemnification and pre-funding obligations of the issuer towards the guarantor under the guarantee mandate agreement, but not the claims of the holders of covered bonds under the guarantee. Technically speaking, the obligations of the issuer under the covered bonds are, therefore, (aside from the guarantee) unsecured obligations of the issuer. Moreover, as opposed to English


The co-existence of Pfandbriefe and structured covered bonds is underscored by the fact that they tend to serve different investor bases


the issuer; and (iii) failure to rectify any shortfall in the cover pool, as established by the asset coverage or interest coverage test. While an issuer event of default accelerates


the payment obligations of the issuer, it will not change the payment schedule under the guarantee. Accordingly, amounts of principal and interest will be payable by the guarantor as originally stipulated in the terms of the bonds as long as no guarantor event of default occurs. Such an event would occur if a guarantor failed to make any payments when originally due, an amortisation test failed or if the guarantor itself became insolvent. As indicated, the guarantee is issued


according to a Swiss law guarantee mandate agreement entered into between the issuer and the guarantor. Under this agreement, the issuer instructs the guarantor to issue a guarantee for the benefit of the holders of covered bonds, on the account and risk of the issuer. As consideration for the issuance of the guarantee by the guarantor, the issuer pays to the guarantor an annual guarantee fee. As mentioned earlier, the issuer also undertakes to indemnify and pre-fund the guarantor for any outstanding and future amounts payable by the guarantor under the guarantee, and to reimburse any such payments made by the guarantor which have not been pre-funded.


covered bonds, the issuer does not sell the mortgages in the cover pool. Rather, for Swiss insolvency law and other reasons, they are only transferred to the guarantor for security purposes.


The cover pool As indicated, the cover pool consists of residential mortgage loans which are transferred for a security purpose to the guarantor, together with the related mortgage certificates. Accordingly, the guarantor will acquire the legal title in the mortgage certificates, which represent the lien on the residential real estate encumbered. In addition, certain substitutes such as cash or governed bonds may form part of the cover pool. Each mortgage certificate transferred will continue to secure only the related mortgage loan and cannot be enforced unless a relevant mortgage loan is in default. Together with a number of other precautions, this helps to ensure that the interests of the mortgage debtors are not unfairly prejudiced by virtue of the transaction. The mortgage loans in the cover pool have


to meet certain eligibility criteria including a certain maximum loan-to-value ratio. Moreover, the composition of the cover pool has to meet additional criteria under an asset coverage test and an interest coverage test,


including a minimum amount of over- collateralisation acceptable to the rating agencies. Accordingly, the mortgages in the cover pool are subject to regular replenishment and substitution in order to ensure ongoing compliance with the relevant tests and eligibility criteria. Compliance with the eligibility criteria


and the relevant tests are monitored by an independent asset monitor on a pre-defined, random basis. In case of insolvency of the issuer, the bondholders benefit, in addition to their direct recourse to the issuer, from the guarantee issued by the guarantor, which is backed by the assets in the cover pool. While mortgages in the cover pool have been transferred to the guarantor for security purposes only and, therefore, have remained on the balance sheet of the issuer, in an insolvency of the issuer, the assets in the cover pool would be segregated from the estate of the issuer. Accordingly, as the guarantor is the title owner of the cover pool assets it may, subject to any avoidance action, manage and enforce such assets independently from any insolvency procedure concerning the issuer. An enforcement event in respect of the


cover pool assets event will occur upon the earlier of (i) a breach of certain pre-maturity tests aiming at creating a sufficient amount of liquidity in the cover pool in respect of certain payments under designated series of so-called hard-bullet covered bonds; (ii) any failure by the issuer to pay an amount due under the indemnity and pre-funding obligation in relation to the guarantee or certain other obligations; and (iii) in case of a bankruptcy or equivalent proceedings in relation to the issuer, completion of the relevant insolvency proceedings. Upon the occurrence of an enforcement event, the guarantor is entitled to liquidate a sufficient part of the cover pool assets by collecting the mortgage claims (if and when they fall due) or, subject to certain restrictions, by way of a private sale of mortgage assets to an eligible investor.


An improved outlook Recent developments have not only highlighted the importance and versatility of the Swiss Pfandbrief, but have also increased the options available to Swiss mortgage institutions. The development of a transaction structure compatible with the Swiss legal environment, the prevailing practice in the Swiss mortgage business and the requirements of issuances into international markets, offers Swiss mortgage lenders flexibility and improved access to international institutional investors.


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