Ukraine Enters the Covered Bond Market
Experts view the creation of the secondary mortgage market to be a major objective for development of Ukraine’s financial system. The successful placement of Ukrgazbank’s pilot mortgage covered bond (50 million UAH, 10.5% for three years and oversubscribed) signals Ukraine’s entry into a two trillion-dollar European mortgage covered bond market. This accomplishment is the result of 18 months of intensive work by the USAID-funded Access To Credit Initiative (ATCI) and its counterparts, and represents the culmination of four years of preparation by USAID that began with passage of the mortgage law in Ukraine.
This new instrument now provides the opportunity for financial institutions to liquefy in excess of US$4 billion in outstanding mortgages currently held in portfolios throughout Ukraine. It serves to create a much-needed financial instrument with minimal credit risk for the domestic market, appropriate for investment by pension funds and insurance companies forecast to have investment requirements in excess of $150 million per month beginning in 2009 with the implementation of second pillar pension reform.
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| At the presentation of a pilot covered bond issue |
With the objective of developing an effective mortgage lending sector in Ukraine, ATCI prepared for issuance by drafting the implementing regulations for the covered bond law; securing their adoption by the Securities Commission (SSMSC); subsequent registration by the Ministry of Justice; selecting banks willing to participate and preparing their software to produce the required fields of data; performing duration analysis with differing pre-payment scenarios; and, selecting mortgages with optimal characteristics suitable for the first pilot (i.e., favorable loan-to-value ratios, seasoning, currency mix, regional distribution of credits to harmonize risk, etc.).
The issue features the use of a bond manager—in this case, HVB, the well-known German bank–adding a layer of oversight for investors that transcends any scrutiny traditionally exercised by a regulator. The auditor employs a methodology referred to as “agreed-upon procedure” developed by ATCI and adopted by the Big Four international public accountancy firms to verify the existence and state of the collateral for the bond manager through periodic reporting. ATCI drafted the master agreements that govern the relationships between the issuer, the bond manager and the auditor for their use. The Initiative also prepared materials that explain the unique features of the bond and its indicative pricing for marketing the bond through investor calls and individual presentations to ten institutional investors.
ATCI expects that within the next five years this pilot will have precipitated covered mortgage bond trade in the billions of dollars resulting not only in lower lending rates and increased availability of credit but in the expansion of tradable securities for the domestic fixed-income market.
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