Territorial covered bonds are securities that banks and credit institutions in general issue with the backing of their extensive loan portfolios and loans they grant to public administration (autonomous communities, national government, etc) and other similar organisations.
These covered bonds have several additional guarantees, making them very beneficial for all parties. First, they enable entities to obtain cheaper financing. Second, this is a saving that the government can also receive, so it also benefits. Finally, investors also benefit, as they have access to guaranteed fixed income instruments giving them greater security. These new financial assets were created as a result of the 2002 Finance Act. They are similar to mortgage covered bonds, although territorial bonds have better guarantees. Credit institutions or banks may issue them up to an amount not exceeding 70% of the volume of outstanding loans and credits it has granted to public administrations.
When investors acquire these assets, they can increase the investment limit on the securities issued by the same entity by 25%, as their amount is guaranteed.
In summary, territorial covered bonds have a twin guarantee and very high ratings. This makes them a very suitable option for public sector and private investment. Given their success, they may lead to lower funding costs, and may even replace other forms of financing.
Covered bonds
Covered bonds are securities issued by banks, savings banks and other financial institutions, with fixed returns. These bonds are issued with the backing of the bank's mortgage portfolio.
This means that they are backed by all of the financial institution's mortgages. These bonds have maturities of between one and three years, depending on the case. Depending on the collateral they are backed by, these may be: covered bonds with specific collateral, if they are backed by several specific loans; or covered bonds with global collateral, if they are backed by all the financial institution's mortgages, except those that have special collateral.