Allen & Overy Advises on the UK's first covered bond

18 July 2003 International law firm Allen & Overy advised HBOS on the UK's first Covered Bond Programme, which has been rated triple A by all three agencies.

Covered bonds, known in Germany as Pfandbriefe, are a large and well-established part of the German financial landscape. The securities are known as "covered" bonds because they are backed, through dedicated covered bond legislation, against a specific pool of assets of the bank. Pfandbriefe differ from traditional mortgage backed bonds in that the bank keeps the assets on its balance sheet rather than selling them to a special purpose vehicle.

Although the UK does not have covered bond legislation, the same result has been achieved under the HBOS Covered Bond Programme by using the principal features of RMBS securitisations. The bonds issued from time to time under the Covered Bond Programme by HBOS Treasury Services plc (a double A rated
entity) are guaranteed by HBOS Covered Bonds LLP, a special purpose vehicle, and secured against the assets (residential mortgage loans acquired from Halifax plc) of the SPV.

The bonds issued under the HBOS Covered Bond Programme are therefore a hybrid between corporate bonds and residential mortgage backed securities in that the bonds are issued and serviced by the financing arm of the HBOS Group without in any way relying on the cashflows of the SPV. The cashflows of the SPV are used to service the bonds only after a call is made on the guarantee following a failure to pay by the issuer. Other features include the use of a limited liability partnership as the SPV, the issuance of covered bonds under a bond programme and the ability for other members of the HBOS Group to accede to the Programme on new issue dates as sellers of mortgage loans to the SPV.

The programme allows HBOS access to deep and liquid markets which have traditionally been the domain of European counterparts - bringing the last major European mortgage market which does not enjoy the option of Pfandbriefe-style financing into line with its continental neighbours.

The three lead managers included Citigroup, Dresdner Kleinwort Wasserstein and Goldman Sachs.

The Allen & Overy team, led by securitisation partner Angela Clist (assisted by Carmen Fernandez Mas, James Archibald, Aiden Small and Abbie Grace), debt and derivatives securities partner Matthew Hartley (assisted by Markus Blenntoft), corporate trustee partner Simon Hill (assisted by Jane Kwok), real estate partner Daniel McKimm (assisted by Clare Breeze), derivatives partner Richard Tredgett (assisted by Mia Harris), tax partner Mark Brailsford (assisted by Amrit Dehal and Daniel Lewin), private client partner Richard Turnor (assisted by Rachel Hughes) and restructuring associate Jennifer Marshall.

Commenting on the transaction, Angela Clist said:
"We are delighted to have been involved in creating another financial product for HBOS that rivals the benefits of RMBS master trust structures."

Sidley Austin Brown & Wood (Jenifer Williams and Bryce Peterson) advised the lead managers.