Belgian covered bonds and the mobilisation of receivables for financing purposes

The purpose of both laws is to provide financial and credit institutions with more possibilities to use their assets for their own financing. The portfolios of receivables such as business credits, consumer credits and mortgage loans are often their largest and most important assets. The financial crises have highlighted the need to be able to mobilize their assets to the fullest extent in order to finance themselves in a stable manner. The legal regime, which was into force until very recently, did not allow making use of this financial technique, although this technique has already been widely used abroad. By virtue of the aforementioned laws, the playing field has been levelled.

1.    Covered bonds

Article 3 of the Law on Covered Bonds defines the Belgian covered bonds as a debt security, which fulfils the following conditions:

• (i) the debt security which is or shall be issued by a Belgian credit institution registered on a list of credit institutions authorized by the National Bank of Belgium (hereinafter referred to as the “NBB”) to issue Belgian covered bonds,
• (ii) the debt security for which the issue or the issue programme has been authorized by the NBB and been registered on a dedicated public list and
• (iii) for which a special and separate estate has been set up.

From the abovementioned definition, the following aspects can be highlighted.

The Belgian covered bonds are directly issued by credit institution and will in principle be maintained on the balance sheet until their maturity date. Only Belgian credit institutions, hereto specially authorized by the NBB can issue Belgian covered bonds. The registration of these credit institution on a specific list published by the NBB on its website, shall form proof of this consent.

The main feature of the Belgian covered bonds is the special mechanism, which is introduced to protect the holders of these covered bonds. Covered bonds are similar to conventional bonds, but their uniqueness lies in the fact that they are covered by assets, such as mortgage loans, which are isolated from the general estate of the credit institution, and which forms one or more special estates specifically created for the benefit of the holders of covered bonds. The assets ring-fenced in a special estate (which does not have any other legal personality), are thus exclusively allocated to the benefit of the covered bondholders and certain other creditors involved with the issue of these covered bonds.

The assets (so-called “allocated assets” (“dekkingswaarden” –  “actifs de couverture”)) are on the balance sheet of the issuing credit institution and must belong to one of the following categories:

• (i) mortgage loans;
• (ii) receivables on or guaranteed by public entities;
• (iii) securities issued by securitisation vehicles that securitise exposure on assets composed in the majority of the receivables referred to in (i) and/or (ii);
• (iv) receivables on credit institutions; or
• (v) positions resulting from one or more hedging instruments related to one or more allocated assets or Belgian covered bonds.

Furthermore the Law on Covered Bonds provides in quantitative and qualitative requirements with regard to the composition of the allocated assets and with regard to the requirements for identification of those assets.

Due to the foregoing, the protection of the holders of the Belgian covered bonds is significantly increased. In the event of insolvency of the issuing credit institution, the holders of said bonds will have (i) recourse against the general estate of the credit institution, (ii) as well as exclusive recourse against its special estate.

Finally, it should be noted that the Law on Covered Bonds also provides for a specific category of Belgian covered bonds, namely "Belgische pandbrieven" or "Lettres de gage belges". These are covered bonds, of which the allocated assets meet specific requirements to enable them to receive a favourable equity weighing (pursuant to Article V.16, §2 of the Regulation of the Banking, Finance and Insurance Commission of 17 October 2006.

2.    Mobilisation of receivables for financing purposes

In addition to the Law on Covered Bonds, the Law on Mobilization resolves various issues that made the use for financing purposes (assignment or pledge) of loans held by Belgian credit institutions difficult or unattractive.

Hereinafter the main aspects are briefly discussed.

The Law on Mobilization aims to facilitate the assignment of loans. In this respect it should be noted that the assignment by or to a credit institution, financial establishment or securitisation vehicle of loans on public authorities is no longer subject to stringent rules, as set forth in the Law of 23 September 1993 on Public Procurement. However, the assignment must still be notified no later than the time the request for payment is made to the public authority.

In principle, in the event of an assignment of a loan by or to a credit institution, financial establishment or securitisation vehicle, the debtor may no longer rely on the rules on the statutory or contractual sett-off of claims or the exception non adimpleti contractus (i) as from the time the debtor is notified of the assignment, if the conditions for set-off or the exception non adimpleti contractus are met after the notification date (subject to certain conditions) or (ii) in the absence of an assignment, if the conditions for set-off or the exception non adimpleti contractus are met after the date of the insolvency proceedings affecting the assignor (subject to certain conditions).

The assignment of mortgage loans by or to a credit institution, financial establishment or securitisation vehicle is no longer subject to the stringent rule that requires the execution of a notarial deed and the recording against the assignment in the mortgage register, giving rise to a 1% registration duty.

Finally, it should be noted that the agreements regarding ranking and subordination to establish the ranking of payments of bank receivables, including any arrangement for ranking or subordination in favour of the special estate that has issued Belgian covered bonds are by virtue of law enforceable against third parties.