Co-published Covered bonds guide: UK “ www.iflr.com


Green covered bonds are seen as a potentially vital means of encouraging investment in the renewable energy market


discuss the possibility of developing renewable energy, or green covered bonds. Green covered bonds are seen as a potentially vital means of encouraging investment in the renewable energy market, as part of a transition to a low- carbon economy. Green covered bonds could work by either


structuring covered bond programmes which are collateralised by renewable energy assets, or by using the existing residential mortgage framework but using so-called green residential mortgages as collateral.


Several challenges remain before either of


these options become viable. In relation to both, existing covered bond legislation (assuming regulated status was sought after) would need to be amended to include the assets and (in the case of the green mortgage option) ensure that national bank lenders are incentivised to originate green covered bonds to their domestic market. For covered bonds structured using


renewable energy assets, structuring and credit analysis problems may arise, given there is no


great performance history of such assets, and these assets are likely to lack the homogeneity of, say, residential mortgages. Covered bonds backed by green mortgages


may have more traction, at least in the short term, because they could be structured around a portion of a mortgage that constituted a portion of the borrowings that were applied to finance any green investment in the property.


Covered bonds: the resilient asset class Challenging times remain for the UK covered bond market, indeed for the covered bond market as a whole, but it is hoped that greater clarity and certainty in the forthcoming regulations will emerge. Covered bonds have been one of the most resilient asset classes in the recent global downturn, and there is no reason to suggest that that will not continue to be the case, both on a national, European, and global level.


IFLR/July/August 2013 73


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