Covered bond
Covered bonds are debt securities issued by a bank or mortgage institution and collateralised against a pool of assets that, in case of failure of the issuer, can cover claims at any point of time. They are subject to specific legislation to protect bond holders. Unlike asset-backed securities created in securitization, the covered bonds continue as obligations of the issuer; in essence, the investor has recourse against the issuer and the collateral, sometimes known as "dual recourse". Typically, covered bond assets remain on the issuer's consolidated balance sheet (usually with an appropriate capital charge). As of  beginning of 2019 volume of outstanding covered bonds worldwide was euro 2,577 billion, while largest markets were Denmark (€406 bil.), Germany (€370 bil.), France (€321 bil.) and Spain (€232 bil.). History. Covered bonds were created in Prussia in 1769 by Frederick The Great and in Denmark in 1795. Danish covered bond lending emerged after the Great Fire of Copenhagen in 1795, when a quarter of the city burnt to the ground. After the fire, a great need arose for an organized credit market as a large number of new buildings were needed over a short period  of time. Today nearly all real estate is financed with covered bonds in Denmark, and Denmark is the 3rd largest issuer in Europe. In Prussia these Pfandbriefe were sold by estates of the country and regulated under public law. They were secured by real estate and subsidiary by the issuing estate. In about 1850, the first mortgage banks were allowed to sell Pfandbriefe as a means to refinance mortgage loans. With the mortgage banks law of 1900, the whole German Empire was given a standardized legal foundation for the issuance of Pfandbriefe. Structure. A covered bond is a corporate bond  with one important enhancement: recourse to a pool of assets that secures or "covers" the bond if the issuer (usually a financial institution) becomes insolvent. These assets act as additional credit cover; they do not have any bearing on the contractual cash flow to the investor, as is the case with Securitized assets. For the investor, one major advantage to a covered bond is that the debt and the underlying asset pool remain on the issuer's financials, and issuers must ensure that the pool consistently backs the covered bond. In the event of default, the investor has recourse to  both the pool and the issuer. Because non-performing loans or prematurely paid debt must be replaced in the pool, success of the product for the issuer depends on the institution's ability to maintain the credit quality of the cover pool by replacing the non-performing and repaid assets in the pool. Redemption regimes. There are three major redemption regimes for covered bonds: No uniform trigger events have so far become established on the market to trigger an extension period (beyond the repayment date originally agreed under a soft bullet or CPT structures). Examples of possible triggers within the  soft bullet and CPT structures include (i) the issuer's insolvency and postponement of redemption to a later repayment date by an independent trustee or (ii) the postponement of the original repayment date by the issuer. If investors’ claims can be serviced when they originally fall due, there are no differences between the three payment structures as far as investors are concerned. However, rating agencies view soft bullet, and even more so CPT structures because the refinancing risk is lower, as positive factors in assessing their ratings. Covered bond markets, where "Hard-bullet" structures prevail are Germany, France, Spain and  Sweden. Typical "Soft-bullet" markets are UK, Switzerland, Norway, Italy, Netherlands, Canada and Australia. CPT structures have been seen in the Netherlands, Italy and Poland. Rating agencies' approach to rate covered bonds. A comprehensive high level overview on the way rating agencies are evaluating the credit risk of a covered bond programme can be found in Chapter IV of the European Covered bond Councils (ECBC) Covered bond Fact book. The Factbook is updated annually and also maintains more in depth summaries directly provided by the rating agencies. Rating agencies usually apply a two-step analysis when rating covered bonds: Usually  the issuer's rating is used as a reference point ("CB anchor") from which a probability of default for the issuer's payment obligations is derived.