Bonos Hipotecarios (BH) - Chilean Covered Bonds

1 Who is the issuer?
  • Specialized credit institution
  Comments: The regulation was published in a joint statement by the Chilean Central Bank and the Superintendency of Banks and Financial Institutions (SBIF). This new source of long term funding was created for banking entities.
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
  Comments: In the case of bankruptcy a special procedure in the way of a separated auction or tender process is triggered for those assets and liabilities clearly identified and associated with BH in the Register. Eligible bidders are other public or private financial institutions, and the final buyer must take care of BH payments.
3 Who owns the cover assets?
  • The issuer directly
  Comments: Regulation states that issuers have 18 months since the bond’s date of issuance to allocate the resources to the origination of mortgages. After that period, at the end of each month during the life of the BH, the outstanding balance of mortgages, excluding amounts in arrears, should not be lower than 90% of the outstanding balance of the respective bonds. Any difference between the outstanding amounts of the mortgages and the bonds must be covered by high credit quality fixed income instruments.
4 Is the issuer the originator of the assets?
  • Yes
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
  Comments: The legal framework for Chilean covered bonds:
*The General Banking Law (Ley General de Bancos, LGB): Article 69, n°2, BH issuances; and Articles 125, 126 and 134, special treatment of banking entities under bankruptcy.
*The Chilean Central Bank: Financial Regulation Compendium (Compendio de NormasFinancieras, CNF), Chapter II.A.2, Chilean Central Bank complementary rules.
*Superintendency of Banks (Superintendencia de Bancos e InstitucionesFinancieras, SBIF): RecopilaciónActualizada de Normas (RAN), Chapter 9-2, Complementary rules of the Chilean banking regulatory agency. In particular it stated the obligation of periodic reporting of both bonds and loans, the definition of certain credit indicator limits, specific policies to grant loans and other transparency objectives for the benefit of both clients and investors.
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • General insolvency law
1 What types of assets may be included in cover pools?
  • Exposures to public sector entities
  • Mortgage loans (Mortgage loans for the purpose of this question are taken to include guaranteed real-estate loans.)
  • Exposures to credit institutions
  Comments: Regulation states that issuers have 18 months since the bond’s date of issuance to allocate the resources to the origination of mortgages. After that period, at the end of each month during the life of the BH, the outstanding balance of mortgages, excluding amounts in arrears, should not be lower than 90% of the outstanding balance of the respective bonds. Any difference between the outstanding amounts of the mortgages and the bonds must be covered by high credit quality fixed income instruments.
The 10% remanentcoud be invest in other Fixed Incomes:
Fixed Income Substitute Collateral: Minimum 80% in Sovereign Bonds (Categories: I. and II.):
I. SOVEREING BONDS FIXED INCOME INSTRUMENTS ISSUED BY CHILEAN CENTRAL BANK.
II. SOVEREING BONDS FIXED INCOME INSTRUMENTS ISSUED BY CHILEAN TREASURY.
III. CORPORATE BONDS LOCAL HIGH RATED CORPORATE BONDS. SUB LIMIT OF UP TO 10% OF THE TOTAL OF FUNDS BY EACH BONO HIPOTECARIO ISSUANCE.
IV. BONOS HIPOTECARIOS BONOS HIPOTECARIOS ISSUED BY OTHER BANKING ENTITIES.
V. TERM DEPOSITS TERM DEPOSITS ORIGINATED BY HIGH RATED BANKS ESTABLISHED IN CHILE, EXCLUDING THOSE OF THE ISSUER OF THE COVERED BONDS.
VI. LCH HOUSING LH: LETRAS DE CRÉDITO HIPOTECARIO ISSUED FOR HOUSING PURPOSES BY OTHER BANKING ENTITIES.
VII. UNSECURED BANK BONDS UNSECURED BANK BONDS RATED AA+ OR HIGHER, EXCLUDING THOSE OF OWN ISSUANCE.
2 What is the geographical scope for public sector assets?
  • Domestic
  Comments: These securities are specifically aimed to raise funds for the origination of mortgage loans used to finance the acquisition, construction, repair or extension of residential properties.
3 What is the geographical scope for mortgage assets?
  • Domestic
  Comments: Only residential mortgages for these purposes are accepted as collateral, excluding commercial, public or other types of loans. An additional restriction imposed to define an eligible mortgage is that only new mortgages are accepted.
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
1 LTV is calculated using which valuation?[4]
  • Market value
  Comments: The price of the guarantee is determined by an external expert at in the initial of the mortgage contract. This price is supported until the bank or the regulator sees necessarily to do a new evaluation. The value of the loan is measured by the outstanding of the mortgage credit.
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
    <=80%
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • Yes
  Comments: Indirectly. In the case of bankruptcy, buyers will prefer to buy assets with fewer LTV.
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • Residential      
  Comments: LTV > 80%
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
  • Residential      
5 Is there any additional LTV limit on a portfolio basis?
  • Yes (if yes specify)
    Debt-to-income ratio: less than 25%.
  Comments: The maximum accepted number of arrears of any single loan in the pool is 10 months. Above that, the loan must be replaced with a new one of the same nature. As explained before for the cover-to-bond outstanding balance ratio all amounts in arrears are excluded.
Exposure to market risk
1 Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract?
  • No
2 What is the primary method for the mitigation of market risk?
  • “Natural” matching (matching without the use of off-balance sheet instruments) and stress testing
  Comments: The market risk of the portfolio is absorbed by the balance sheet of the bank. The bank could optionally use derivative hedge instruments to mitigate this risks.
3 If the answer to the above question on market risk mitigation is “Use of derivative hedge instruments”, please specify whether those instruments are entered into:
  • Not relevant
  Comments: The coverage is applied in the general balance sheet of the bank. The risk management is applied for the global risk of the entity.
4 What type of coverage test is applied?
  • Not relevant
  Comments: The coverage is applied in the general balance sheet of the bank. The risk management is applied for the global risk of the entity.
5 What is the frequency of coverage calculations?
  • Not relevant
  Comments: The coverage is applied in the general balance sheet of the bank. The risk management is applied for the global risk of the entity.
6 What types of stress scenarios are applied?
  • Static
  • Dynamic
  • Model based (i.e. VaR)
  Comments: The scenarios are applied in the general balance sheet of the bank. The risk management is applied for the global risk of the entity.
7 What is the frequency of stress test calculations?
  • Monthly
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
  • Yes
  Comments: The prepayment risk is assumed by the bank. Under a balance principle the nominal amount of covered assets must always be at least equal to the outstanding amount of related Bonos Hipotecarios and loans in arrears or prepaid should be replaced always under the restriction that only new mortgages are potentially eligible as collateral for BHs.

Banks are free to structure the BHs according to their own needs and criteria.
9 What is the primary method for the mitigation of liquidity risk on interest payments?
  • “Natural” matching (matching without the use of off-balance sheet instruments) and stress testing (Natural matching is taken to include replacing CBs with new issues, as well as substitute assets.)
10 What is the primary method for the mitigation of liquidity risk on principal payments?
  • Natural matching (matching without the use of off-balance sheet instruments) and stress testing
11 Is there any grace period in case of a breach of liquidity risk mitigants?
  • Lenght of period
    1 month
  Comments: The issuer has the flexibility of an additional one month period to incorporate new mortgage loans of the same nature and quality to comply with the cover asset limit and balance principle at the end of this 18 months allocation period and at the end of each month along the life of the bond.
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Event of default of the issuer
  Comments: In the case of bankruptcy a special procedure in the way of a separated auction or tender process is triggered for those assets and liabilities clearly identified and associated with BHs in the Register. Eligible bidders are other public or private financial institutions, and the final buyer must take care of BH payments. This process, the same as for Letras de Crédito Hipotecarias (LH) is thoroughly covered in the LGB.
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
  • Supervisory authority
  • Rating agency
  Comments: SBIF’s RAN 9.2, n°5, sets conditions for inscription of mortgages on the Register and the required information including: identification of bond issuance and loans; dates of inscriptions; original and substitute loans; identification of fixed income assets held as substitute collateral; and elimination from the register by number of arrears or property value deterioration.

Central Bank’s CNF Chapter II.A.2, n°18, within its explicit transparency and information objectives, details monthly reporting data including: up-to-date average debt-to-income ratios of clients with eligible loans for each series of BH issuances; average value of properties linked to BHs at the date the credit was granted; LTV of the pool updated by loan replacements; loan characteristics (maturity, interest rates, fixed, floating or mixed type, currency denomination, inflation link mechanism and loan prepayment conditions); outstanding balances of loan portfolios and associated BH issuances and, finally, the total amount of fixed income assets and its general characteristics.
14 Are there any regular public reporting requirements for market and liquidity risk?
  • Yes
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • Other
  Comments: Even though the mandatory minimum over-collateralisation is not required, there is an implicit level of over-collateralisation given by the 80% minimum loan-to-value (LTV) defined by law.
16 What is the level of minimum mandatory overcollateralisation?
  • N/A
  Comments: The minimum loan-to-value (LTV) defined by law is 80%. Conditions for valuation are also subject to performing or non-performing status of loans. The maximum accepted number of arrears of any single loan in the pool is 10. Above that, the loan must be replaced with a new one of the same nature. As explained before for the cover-to-bond outstanding balance ratio all amounts in arrears are excluded.

LTV alone is not enough for eligibility of mortgage loans. In addition a maximum debt-to-income ratio of 25% is demanded.
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • No
18 Is there any grace period in case of a breach of the coverage test?
  • Length of period:
  Comments: The issuer has the flexibility of an additional one month period to incorporate new mortgage loans of the same nature and quality to comply with the cover asset limit and balance principle at the end of this 18 months allocation period and at the end of each month along the life of the bond.
19 What is the consequence of not fixing a breach of the coverage test?
  • Other regulatory or rule-based actions
1 Is a special license required for the issuing of covered bonds?
  • Yes with additional requirements compared to general banking supervision regulations
2 Are there special reporting duties of the covered bond issuer to the supervision authority concerning covered bonds and the cover pool, which go beyond the regular banking supervision?
  • No
  Comments: Only monthly regulatory reports to the regular banking supervision.
3 What is the role of the banking supervision regarding covered bonds?
  • To check whether eligibility criteria are fulfilled and documented
  • Checking quality of cover assets (real estate valuations, etc)
  • Evaluation of operational risk
4 Is there a special role of banking supervision in crisis regarding covered bonds?
  • Involvement in transfer of cover assets and covered bonds to another credit institution
5 Is there a cover pool monitor independent from the issuer?
  • Yes
  Comments: The supervision authority
6 If there is an independent cover pool monitor, what are its duties?
  • Reporting duties to the supervision authority
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • Yes
  Comments: Under an eventual credit event/default of an issuer, Articles 125, 126 and 134 of the LGB give BHs the same treatment and current legal status as that of outstanding "LetrasHipotecarias" (LH), a type of mortgage bond frequently used by Chilean banks in the past to finance their mortgage business. These articles regulate the procedures in such case and the mechanisms for the tender process and subsequent transference of eligible loans/assets and liabilities from the defaulted issuer to a new entity.
There are 2 main issues related with bankruptcy in the BH legislation:

1) Since only new loans are accepted as collateral this avoids the possibility of structuring BHs with a selection of the best quality assets which could be against the interests of other creditors such as depositors in case of bankruptcy.

2) In the case of bankruptcy a special procedure in the way of a separated auction or tender process is triggered for those assets and liabilities clearly identified and associated with BHs in the Register. Eligible bidders are other public or private financial institutions, and the final buyer must take care of BH payments. This process, the same as for Letras de Crédito Hipotecarias (LH) is thoroughly covered in the LGB.
2 What is the cover pool?
  • All assets on the cover register
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  • Specific cover pool administration
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, pari passu with unsecured creditors
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • No
6 If derivatives are permitted in the cover pool, what is their ranking?
1 Does the covered bond fulfil the criteria of UCITS 52(4)?
  Comments: Chile is not a member of the European Union. Therefore, and although Chilean BHs will be issued under the existence of a specific country legislation – which is a requirement for these matters – no special treatment or benefit is expected in terms of preferred risk weighting for regulatory capital purposes.
2 For further information regarding the compliance to the criteria of Article 129 of the Capital Requirements Regulation (CRR), please see the following links: http://ecbc.hypo.org/Content/default.asp?PageID=504#position https://www.coveredbondlabel.com
3 Are listed covered bonds eligible in repo transactions with the national central bank?
  • Yes
4 Are there any special investment regulations regarding covered bonds?
1 Link to National Association representing covered bond interests
  • Association
2 Link to national regulators and supervisors
  • List
3 Fact Book Country Chapter
  • Chapter
 
4 Hypostat Country Chapter
  • Chapter