Greek Covered Bonds

1 Who is the issuer?
  • Universal credit institution
  • Special Purpose Entities (SPE)
  Comments: : Greek law provides for three structures for the issuance of covered bonds:
(a) direct issuance by the credit institution which maintains ownership of the cover pool;
(b) direct issuance by the credit institution and guarantee by an SPE which acquires ownership of the cover pool;
(c) issuance by an SPE which acquires ownership of the cover pool, while the credit institution provides a guarantee.

Currently all outstanding covered bonds are based on structure (a). All covered bonds issued under structure (b) have now been redeemed, and it is expected that the regulator will not consider favorably the use of structure (c).
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
  Comments: Depending on which of the above structures is used:
Yes, direct for structures (a) and (b)
Yes, indirect for structure (c).
3 Who owns the cover assets?
  • The issuer directly
  Comments: Depending on which of the above structures is used:
The issuer directly for structure (a)
SPE which guarantees the covered bonds for structure (b) and
the credit institution guarantees the cover bonds for structure (c).
4 Is the issuer the originator of the assets?
  • Yes
  • No
  Comments: Depending on which of the above structures is used:
Yes for structures (a) and (b)
No for structure (c).

As mentioned above the Greek legislative framework permits the issuance of covered bonds in the three ways set out above. In structure (a) the covered bonds are issued by a credit institution and the segregation of the cover pool is achieved through a statutory pledge over the cover pool assets. In structure (c) the covered bonds are issued by a special purpose entity being a subsidiary of a credit institution, which purchases the cover assets from the credit institution by virtue of the provisions of the Bond Loan and Securitization Law, and are guaranteed by the credit institution. Structure (b) is similar to structure (b) in that the cover assets are transferred to an SPE by virtue of the provisions of the Bond Loan and Securitization Law, but the covered bonds are issued by the credit institution based on a guarantee by the SPE.

The reason for introducing structures (b) and (c) was that historically most Greek banks had issued a significant amount of notes under medium term note (MTN) programmes containing negative pledge covenants, which did not allow the creation of security over the cover pool, as is necessary for the direct issuance of covered bonds. All Greek banks having MTN programmes have now amended the terms of such programmes to carve out the security provided to holders of covered bonds from the scope of the negative pledge covenants.

All covered bonds issued under structure (b) have now been redeemed and all others have used structure (a).

Global comments for this chapter

In Greece, the primary legal basis for covered bond issuance is article 91 of Law 3601/2007 “On the Undertaking and Exercise of Activities by Credit Institutions, Sufficiency of Own Funds of Credit Institutions and Investment Services Undertakings and Other Provisions”, which entered into force on 1 August 2007 (the “Primary Legislation”) and as amended by article 48 of law 3693/2008 and article 69 of law 2746/2009. The Primary Legislation supersedes general provisions of law contained in the Civil Code, the Code of Civil Procedure and the Bankruptcy Code. By way of implementation of the Primary Legislation and pursuant to an authorization provided by the latter, the Governor of the Bank of Greece has issued Act nr. 2598/2.11.2007, subsequently replaced by Act nr. 2620/28.8.2009 (the “Secondary Legislation”). Finally, the legislative framework in Greece is supplemented by Law 3156/2003 “On Bond Loans, Securitization of Claims and of Claims from Real Estate” (the “Bond Loan and Securitization Law”), to the extent that the Primary Legislation cross-refers to it.
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • General insolvency law
  • Specific legal framework superseding the general insolvency law
  Comments: Credit institutions are in theory subject to either bankruptcy under the Bankruptcy Code or special liquidation administered by the regulator (the Bank of Greece). The special liquidation regime takes precedence over the bankruptcy proceedings in the sense that even if a credit institution is declared bankrupt, the bankruptcy proceedings will stop if it is placed in special liquidation. In practice it is considered that the regulator would never permit a credit institution to become subject to bankruptcy under the Bankruptcy Code, but would submit it to special liquidation. The primary legislation on covered bonds deviates from both the provisions of the Bankruptcy Code and the provisions on special liquidation.

Global comments for this chapter

In case of a direct issuance (structure (a)) the cover assets are segregated from the remaining estate of the credit institution through a pledge constituted by operation of law (statutory pledge). In case of assets governed by a foreign law (which will typically include inter alia claims from derivative contracts) a security interest must be created in accordance with such foreign law. The statutory pledge and the foreign law security interest secure claims of the holders of covered bonds and may also secure (in accordance with the terms of the covered bonds) other claims connected with the issuance of the covered bonds, such as derivative contracts used for hedging purposes. The statutory pledge and any foreign law security interest is held by a trustee for the account of the secured parties.The claims constituting cover assets are identified by being listed in a document signed by the issuer and the trustee. A summary of such document is registered in the land registry of the seat of the issuer. Claims may be substituted and additional ones may be added to the cover pool through the same procedure.The Primary Legislation creates an absolute priority of holders of covered bonds and other secured parties over the cover pool. The statutory pledge supersedes the general privileges in favor of certain preferred claims (such as claims of employees, the Greek state and social security organization) provided for by the Code of Civil Procedure. Furthermore upon registration of the summary of the document listing the claims included in the cover pool, the issuance of the covered bonds, the establishment of the statutory pledge and the foreign law security interest and the entering into of all contracts connected with the issuance of the covered bonds are not affected by the commencement of any insolvency proceedings against the issuer.
In case of structures (b) and (c) the cover pool assets are segregated from the estate of the credit institution by virtue of their sale to the special purpose entity. For such transfer the provisions of the Bond Loan and Securitization Law apply, which provide equivalent protection from third party creditors and insolvency to the one the Primary Legislation provides in case of direct issuance. It is worth noting that according to the Primary Legislation both in case of direct and of indirect issuance the cover assets may not be attached. This has the indirect result that the Greek law claims constituting cover assets are no longer subject to set-off, because according to article 451 of the Greek Civil Code claims which are not subject to attachment are not subject to set-off. This is important because under generally applicable law borrowers the loans to whom become cover assets would have had a right to set-off, which would reduce the value of the cover pool, for all counterclaims (including notably deposits) predating the creation of the pledge or the transfer of the claims, as the case may be. No specific provisions exist in relation to voluntary overcollateralisation. As a result the segregation applies to all assets of the cover pool, even if their value exceeds the minimum required by law. The remaining creditors of the credit institution will only have access to any remaining assets of the cover pool after the holders of the covered bonds and other creditors secured by the cover pool have been satisfied in full.
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.)
  • Ship loans
  • Exposures to credit institutions
  Comments: Cover assets are primarily residential mortgage loans, loans secured by a mortgage on commercial properties, loans secured by a mortgage on ships and loans to or guaranteed by state entities and derivatives.
The above assets form the basis of the cover pool. The cover assets may be substituted by certain tradable assets but only up to the amount by which the aggregate nominal value of the cover assets including accrued interest exceeds the nominal value of the outstanding covered bonds including accrued interest.
2 What is the geographical scope for public sector assets?
  • Domestic
  • Multilateral development banks
  • EEA
  • CH
  • USA, Canada, Japan
  • OECD
  • NZ AUS
  • Other
  Comments: Domestic and other EU public sector assets are eligible without further requirements. Assets of the following multilateral development banks are eligible: International Bank for Reconstruction and Development, International Finance Corporation, Inter-American Development Bank, Asian Development Bank, African Development Bank, Council of Europe Development Bank, Nordic Investment Bank, Caribbean Development Bank, European Bank for Reconstruction and Development, European Investment Bank, European Investment Fund, Multilateral Investment Guarantee Agency, International Finance Facility for Immunisation and Islamic Development Bank.

The eligibility of non-EU public sector assets depends on the credit rating of the issuer and on the currency of the relevant asset.
3 What is the geographical scope for mortgage assets?
  • Domestic
  Comments: Residential and commercial mortgage loans may only be included in the cover pool if the property subject to the mortgage is situated in Greece and hence is governed by Greek law.
There is currently an ongoing discussion about permitting the inclusion of foreign mortgage loans.
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
  Comments: Credit institutions that issue (directly or indirectly) covered bonds must provide in their financial statements and on their websites information on the covered bonds including on the nominal value and net present value of the bonds and the cover pool, the net present value of derivatives used for hedging.

More particulary, pursuant to part ΙV of the Secondary Legislation there are the following disclosure requirements to the Bank of Greece until the end of March of each year in relation to data as of end of December of the year preceding:

a) The certified by chartered accountant / auditor results arisen following the audit conducted pursuant to the provisions of the Secondary Legislation and following the follow-up of processes and restrictions as set by the Secondary legislation. Any detailed presentation of data, methods and parameters used should also be mentioned.

b) Detailed data of the cover pool assets that would confirm the restrictions set under the Secondary Legislation along with the information related to the real estate’s revaluation of the mortgages and other loans.

c) The following data and information:

(i) weighted average interest-rate per category of assets and weighted average interest-rate of all cover pool assets

(ii) the real estate values of the mortgages and of the other loans,

(iii) validation of the selected policy of risk hedging with detailed analysis of the degree of effectiveness of this

(iv) table of corresponding maturities of the covered bonds and corresponding assets of the cover pool and the derivatives.

Finally all the credit institutions have to communicate to the Bank of Greece, within 30 days from the expiry of each quarter, with data of 1st, 2nd and 3rd quarter end, concise information with regards to the results from the tests provided under the Secondary Legislation.

In case the covered bonds are disposed by public offer, in such case law 3401/2005 is applicable (law 3401/2005 is the prospectus law which transposed the prospective Directive 2003/71/EC) along with the Commission Regulation 809/2004.
1 LTV is calculated using which valuation?[4]
  • Market value
  Comments: The valuation of properties must be performed by an independent valuer at or below the market value and must be repeated every year in relation to commercial properties and every three years in relation to residential properties.
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
    80%
  • Commercial      
    60%
  • Ships
    60%
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • Yes
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • Ships      
  Comments: In relation to residential and commercial mortgages only the amount exceeding the LTV cap is non-eligible, whereas in relation to shipping loans exceeding the LTV cap (60%), the entire loan appears to be ineligible. Thus by way of example a loan of 900.000 Euros secured through a residential mortgage over a property valued at 1.000.000 Euros may be included in the cover pool but will be deemed for the purposes of the calculation of the statutory tests to be equal to 800.000 Euros.
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
  • Ships      
  Comments: While the relevant provisions are not explicit on this point, it would appear that shipping loans that cease to be eligible, would no longer be taken into account in the calculation of the cover pool. However, to the extent that non-eligible assets are not removed from the cover pool, investors will have the benefit of such assets.
5 Is there any additional LTV limit on a portfolio basis?
  • No

Global comments for this chapter

The valuation of properties must be performed by an independent valuer at or below the market value and must be repeated every year in relation to commercial properties and every three years in relation to residential properties.
Exposure to market risk
1 Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract?
  • Yes
  Comments: The Secondary Legislation provides for tests that must be met for the full duration of the covered bonds. Such tests include inter alia a requirement that the net present value of the liabilities secured by the cover pool must at all times not exceed the net present value of the cover pool assets taking into account a parallel move of the yield curve by up to 200 basis points. Therefore in practice there is a legal requirement to provide for measures to mitigate such interest rate risk. In addition in practice both interest rate and (if such risk exists in the structure) currency risk is required by contract to be mitigated usually through appropriate derivative instruments.
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 use of derivatives hedging instruments is permitted, but to the extent the counterparties are credit institutions or investment services undertakings, the relevant exposures must not exceed 15% of the nominal value of the covered bonds.
Consquently, both methods are used in practice. For instance currency risk has been avoided in the first covered bond issuance by denominating the covered bonds in Euros and including in the cover pool only loans denominated in Euros. However, in relation to interest rate risk it is difficult in practice to rely on natural matching (due to the variety of interest rates used by most Greek banks in relation in particular to residential mortgages) and therefore the use of interest rate swaps is unavoidable.
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:
  • By the time of issue of covered bonds or entry of asset in the cover pool
  • On a trigger event, such as a rating downgrade
  Comments: Typically hedging derivatives are entered into by the time of issuance, because otherwise there can be no assurance (to the extent there is no perfect natural matching) that the test of the Secondary Legislation, as described under V.1 above and any additional tests agreed by the parties will be satisfied. It is a commercial matter whether the derivative instruments are entered into from the beginning or upon rating downgrade.
4 What type of coverage test is applied?
  • Nominal cover
  • Present value cover
  Comments: The Secondary Legislation provides for the following statutory tests:

(a) The nominal value of the Covered Bonds including accrued interest may not exceed at any point in time 95% of the nominal value of the cover assets including accrued interest.

(b) The net present value of obligations to holders of Covered Bonds and other creditors secured by the cover pool may not exceed the net present value of the cover assets including the derivatives used for hedging. This test must be met even under the hypothesis of a parallel movement of the yield curve by 200 basis points.

(c) The amount of interest payable to holders of Covered Bonds for the next 12 months must not exceed the amount of interest expected to be received from the cover assets over the same period. For the assessment of the fulfillment of this test derivatives entered into for hedging purposes are taken into account.

Tests (b) and (c) are performed on a quarterly basis. In case any of the tests is not met (either when performed on a quarterly basis, or if the credit institution becomes aware at any other time that the tests are not met), the credit institution is obliged to immediately take the necessary measures to remedy the situation.

The results of the tests (a) to (c) above and the procedures used to monitor the compliance with such tests are audited on a yearly basis by an auditor independent of the statutory auditors of the credit institution.
5 What is the frequency of coverage calculations?
  • Quarterly
  Comments: Please see comment provided under answer V.4
6 What types of stress scenarios are applied?
  • Dynamic
  Comments: See above under V1 on the calculation of the present value test under the hypothesis of a parallel movement of the yield curve up to 200 basis points and also please see comment provided under answer V.4 for the tests applicable.
7 What is the frequency of stress test calculations?
  • Quarterly
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
  • Yes
  Comments: Liquidity risk in relation to interest payments is required to be mitigated for the next 12 months on a rolling basis in accordance with one of the tests provided in the Secondary Legislation (see above V4). Additional mitigation of the liquidity risk may be provided by contract.
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.)
  Comments: The interest payable to covered bond investors over the next 12 months must not exceed the interest receivables from the cover pool assets taking into account derivative hedging instruments.
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
  Comments: The covered bond legislation does not include requirements for the mitigation of the liquidity risk on principal payments.
11 Is there any grace period in case of a breach of liquidity risk mitigants?
  • No
  Comments: The statutory liquidity test referred to above under V.4 and V.8 provides for no grace period, as the credit institution must take immediately action to restore the test. Contractual mitigants may be subject to a grace period.
In case test it is found during the quarterly that the requirement described under V.9 is not satisfied the credit institution must immediately rectify the situation.
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Other regulatory or rule-based action
  Comments: The breach of the covered bond legislation will lead to regulatory sanctions. The parties can also agree that the breach of the statutory tests constitutes an event of default.

Moreover, since the Bank of Greece approves each issuance of covered bonds, it would not approve any issuance in case the statutory tests (including the liquidity test) are not met. Therefore a breach of the statutory (but not of any contractual) liquidity test would in practice lead to a Programme freeze. Also the failure to comply with the requirement to restore the statutory tests may lead to sanctions by the Bank of Greece. Apart from the sanctions provided by the Primary and the Secondary Legislation, the contracting parties may agree to additional sanctions, in particular to alternative administration or an event of default.
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
  • Supervisory authority
  • Trustee/cover pool monitor
  Comments: The compliance with statutory tests is audited by independent auditors. Such audit reports, as well as the quarterly compliance reports by the credit institution must be submitted to the Bank of Greece as regulator.
14 Are there any regular public reporting requirements for market and liquidity risk?
  • Yes
  Comments: Please see above comment provided under question III.4
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • By legislation/regulation
  Comments: See above comment provided under question V.4.
16 What is the level of minimum mandatory overcollateralisation?
  • 5.26%
  Comments: The nominal value of the covered bonds plus accrued interest cannot exceed 95% of the value of the cover pool assets.
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
  Comments: All cover assets are subject to a pledge by operation of law in favour of the covered bondholders and therefore assets in excess of the mandatory overcollateralisation are still subject to such pledge.
18 Is there any grace period in case of a breach of the coverage test?
  • No
  Comments: Programme freeze (neither sale of assets nor new issuance allowed)
Other regulatory or rule-based actions.

General Comment: Since the Bank of Greece approves each issuance of covered bonds, it would not approve any issuance in case the statutory tests (including the coverage test) are not met. Therefore a breach of the statutory (but not of any contractual) coverage test would in practice lead to a Programme freeze. Also the failure to comply with the requirement to restore the statutory tests may lead to sanctions by the Bank of Greece. Apart from the sanctions provided by the Primary and the Secondary Legislation, the contracting parties may agree to additional sanctions, in particular to alternative administration, redirection of cashflows or an event of default.
19 What is the consequence of not fixing a breach of the coverage test?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Other regulatory or rule-based actions
  Comments: The breach of the covered bond legislation will lead to regulatory sanctions. The parties can also agree that the breach of the statutory tests constitutes an event of default.
1 Is a special license required for the issuing of covered bonds?
  • Yes with additional requirements compared to general banking supervision regulations
  Comments: According to the Primary Legislation, covered bonds may be issued (or in case of an indirect issuance guaranteed) by credit institutions having Greece as home member state. However, in case of issuance of covered bonds by a credit institution having as home state another member state of the European Economic Area (EEA) and provided that they are characterized as covered bonds in accordance with the law of such member state, the provisions of the Primary Legislation on the creation of a statutory pledge will apply in relation to claims governed by Greek law, as well as the tax exemptions which apply to Greek bonds. Therefore foreign banks established within the EEA having a significant loan portfolio in Greece may use the loans of such portfolio as part of the cover pool.

The Secondary Legislation sets additional prerequisites for the issuance of covered bonds. Specifically the credit institutions issuing covered bonds:

(a) must have certain minimum risk management and internal control requirements including suitable policies and procedures for the issuance of covered bonds, organizational requirements, IT infrastructure and a policy for the reduction and management of risks deriving from the issuance of covered bonds, such as interest rate risk, counterparty risk, operational risk, FX risk and liquidity risk; and

(b) must have aggregate regulatory capital of at least 500 million Euros and a capital adequacy ratio of at least 9%.
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?
  • Periodic reporting required
  Comments: See above comment provided under question III.4
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)
  • Monitoring of exposure to market risk and liquidity risk
  • Evaluation of operational risk
  • To check minimum mandatory overcollateralisation requirements
4 Is there a special role of banking supervision in crisis regarding covered bonds?
  • Safeguarding ongoing management of the cover pool directly or via a special administrator
  Comments: The Bank of Greece will only appoint a servicer of the cover pool if the trustee fails to do so in an insolvency of the issuer.
5 Is there a cover pool monitor independent from the issuer?
  • Yes
  Comments: An independent auditor must provide an annual report on the compliance with the statutory tests and the eligibility of the cover pool assets.
6 If there is an independent cover pool monitor, what are its duties?
  • Performing audits of the cover pool
  • Reporting duties to the supervision authority
  • Verification of coverage tests
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
2 What is the cover pool?
  • All assets on the cover register
  • All assets transferred to SPE
  • All assets pledged
  Comments: Depending on the structure used for the issuance of covered bonds the assets are segregated either through the creation of a statutory pledge over assets owned by the issuer and specified in a register or through the transfer of assets to an SPE.
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  • Preferential claim by law
  • Transfer of assets to an SPE
  • Pledge of assets to an SPE
  • Specific cover pool administration
  Comments: Depending on the structure used for the issuance of covered bonds.
The general principle is that the pledge by operation of law created in favour of the bondholders and other creditors (such as the trustee, hedging counterparties etc.) specified in the contractual documents constituting the covered bonds takes precedence over the claims of all other creditors, including preferred creditors.
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
  Comments: There are no statutory provisions to this effect, but the parties can agree that the derivatives will continue, as they are part of the cover pool and hence outside the bankruptcy estate of the credit institution.
6 If derivatives are permitted in the cover pool, what is their ranking?
  • Pari passu to covered bond holders
  Comments: The law permits claims of derivative counterparties to rank pari passu with covered bondholders. In theory it would be possible for such claims to also be subordinated, but this is contrary to market practice.
1 Does the covered bond fulfil the criteria of UCITS 52(4)?
  • Yes
  Comments: The risk weighting of covered bonds (both Greek and foreign) is regulated by Part B par. 8 2588/20.8.2007, transposing part of the Capital Requirements Directive into Greek law. According to this bonds falling within the provisions of art. 22 par. 4 of the UCITS Directive are considered to constitute covered bonds, provided that the cover pool consists of the assets enumerated in the Capital Requirements Directive. By way of exception, bonds issued before the 31st December 2007 and falling within the provisions of art. 22 par. 4 of the UCITS Directive are considered as covered bonds, even if the cover assets do not comply with the Capital Requirements Directive. covered bonds have a risk weighting of 10%, if openings to the issuing credit institution have a risk weighting of 20%, and a risk weighting of 20%, if openings to the issuing credit institution have a risk weighting of 50%.

Directly issued Greek covered bonds comply with both the UCITS Directive and the Capital Requirements Directive and therefore have the reduced risk weighting mentioned above in Greece and should also have it in other EU member states. In relation to indirectly issued covered bonds it must be noted that they do not fall within the letter of art. 22 par. 4 of the UCITS Directive, because they are not issued by a credit institution.
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?
  • No
1 Link to National Association representing covered bond interests
  • Association
2 Link to national regulators and supervisors
3 Fact Book Country Chapter
  • Chapter
 
4 Hypostat Country Chapter
  • Chapter