6904327 goldman sachs 4a covered bonds 01 march 11 eldar

8/6/2019 6904327 Goldman Sachs 4a Covered Bonds 01 March 11 Eldar

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Covered Bond

March, 2011


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Table of Contents

I. Covered Bond Overview

II.

Covered Bond Jurisdictional/Legal Frameworks


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1

I. Covered Bond Overview


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2

Covered Bond OverviewBackground

Covered bonds are a direct obligation of the issuing entity (usually a financial institution) held on balance sheet; ineffect, these are collateralized obligations of the issuer which place covered bondholders in a more seniorposition than senior unsecured creditors

Specific legislative frameworks or contractual agreements define the rules on management of cover asset poolssuch as minimum overcollateralisation and max LTV for mortgages

Issuers need to adhere to these requirements at all times which, in effect, protects covered bond creditors

There have been no covered bond defaults in the 240 year history of the product

Rating methodologies have evolved to incorporate broader risk factors but a key factor is that, in the event of abank default, the covered bonds would not be expected to follow the supporting bank into insolvency

Until early 2008, covered bonds historically traded as a swaps proxy within the interest rate space

Investors viewed the credit risk in covered bonds as negligible with minimal differentiation between issuingentities, jurisdictions and collateral types

In 2008 covered bonds started to trade as a credit product rather than an instrument in the interest rate space

The investor base was reduced significantly, with central banks almost completely abandoning the market,although we have recently seen some of the larger participants return to the sector

Large differentials emerged between jurisdictions (legislative versus contractual covered bonds), collateraltypes and issuing entities

Trading levels started to be based on discounted senior unsecured pricing, rather than pure collateral valuation

Today, the premium paid by fixed income investors for covered bonds varies by jurisdiction and collateral

type


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Covered Bond OverviewKey Risks

Cover pool risk

Characteristics of eligible assets

Static analysis: residential mortgages, commercial mortgages and public sector pools

Impact of dynamic pools on creditworthiness

Issuer risk

Credit quality of the ultimate parent and covered bond issuing entity

Correlation between credit quality of issuer and that of collateral pool

Evaluating the issuers business organization: origination practices, client base and IT systems

Implications of covered bond issuance on bank rating operational risk

Scope/independence of asset monitors role and relevance to performance

Liquidity risk

Implementation of the new liquidity standards may have a significant impact on AAA markets.


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Covered Bond Overview

Comparison with MBS

An issuer is legally and/or contractually required to maintain the quality and size (including over-collateralisation) ofa cover pool even if the quality of the overall loan book deteriorates

Issuer must continuously replace maturing and/or non-performing collateral with performing collateral; this

process is monitored by trustees who in turn are accountable to financial regulatory authorities

General differences between standard covered bonds and standard MBS include the following:

Covered Bonds Mortgage-backed Securities

Debt type In most cases direct bank debt Debt issued by Special Purpose Corporations

On/off balance sheet On balance sheet of originator Off balance sheet of originator

Cover assets Covered bond issuance off one program so all rank pari Each MBS transaction backed by separate pool of assets

Tranches No tranching of covered bonds Senior and subordinated tranches

Asset pool dynamics Dynamic revolving pool of qualifying collateral Usually static pool of assets

Substitution Non-performing loans normally substituted by originator No substitution of non-performing loans

Cashflow transformation Yes, as part of the cover asset pool management Generally pass-through of cashflows

Recourse to originator Full recourse to originator for covered bondholders No recourse to originator

Originator default In case of originator default segregation of cover assets MBS normally not affected by originator default

Bondholder protection Preferential claim on cover assets, senior to other creditors Exclusive claim on cover assets

Claim on other assets Pari passu with senior note holders on non-cover assets No claim on originator assets outside the MBS pool


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5

Covered Bond Market Outlook

Record volumes of benchmark issuance expected in 2011

Benchmark Issuance (bn equiv.) Benchmark Redemptions (bn equiv.)

5

15 14

49

125120

97 97

130135

154

191

171

96

122

201

95

[215]

0bn

40bn

80bn

120bn

160bn

200bn

240bn

-95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11-11E

EUR USD GBP

We expect 2011to be arecord year of CB

benchmark issuance(215bn GS estimate) partlydriven by Basel 3 liquidityand funding regime

implementations as wel l asremainingly significantSenio r/Covered fundingcos t d ifferentials

168

119

109

154

134142

108

85

3831 31

34

17

83

14

4 4

0bn

40bn

80bn

120bn

160bn

200bn

240bn

-10 -11 -12 -13 -14 -15 -16 -17 -18 -19 -20 -21 -22 -23 -24 -25 -26 -27

EUR

USD

GBP

40

60

80

100

120

140

Sep-10 Oct-10 Dec-10 Jan-11

Differential(bps)

Germany France Nordic Benelux

Senior/Covered funding cost differential remains significant


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Covered Bond Market Developments

Strong start in 2011 combined with net supply from Germany

Benchmark Issuance (bn equiv.) Benchmark Redemptions (bn equiv.)

Monthly Benchmark Issuance (bn equiv.)

Source: GS Analysis

64

44

34

4960 56

2432 33

42

18

311

35

50

27

68

4953

31

96

0

10

20

30

40

50

60

70

80

90

100

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Germany Spain France UK Sweden Italy Other

39 38

2518

36

24 2128

71

2529 29

47

30 28 29

42 40

24

36

0

10

20

30

40

50

60

70

80

90

100

Q111

Q211

Q311

Q411

Q112

Q212

Q312

Q412

Q113

Q213

Q313

Q413

Q114

Q214

Q314

Q414

Q115

Q215

Q315

Q415

Germany Spain France UK Sweden Italy Other

19

10

4

15

20

67

5 53

0

42

52

17 16

19

3

28

1214

1

31

12

25

17

2

30

1310

30

21

9

1

49

28

20

0bn

5bn

10bn

15bn

20bn

25bn30bn

35bn

40bn

45bn

50bn

January February March April May June July August September October November December

2008 2009 2010 2011

2011 hasstarted offwith recordhigh issuancevolumes inJanuary andFebruary

January 2011was a recordmonth with

49bn

benchmarkissuance

Net negativeGermansupply of2011 is

expected tobe picked-up byFrench,Nordic andBeneluxissuers


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Covered Bond Market Developments

French sitting in the front seat in the beginning of 2011 driving tenors longer out on the curve

Benchmark Issuance by Maturity (bn equiv.) Benchmark Issuance by Jurisdiction (bn equiv.)

515 14

49

125120

97 97

130135

154

191

171

96

122

201

96

0

50

100

150

200

250

300

-95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11


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The Evolution of the Covered Bond Product

Resilience of covered bonds during the crisis

Number of inaugural Issuances Covered bond versus MBS issuance

1

3

1 1 1 11

3

1

1 1

3 3

3

1

9

45

6

23

12

3 1

32

23

2

1

1

3

3

1

3

3

3

2

2

2 2

4

2

2

2

5

1

2

6

4

6

4

1

3

3

2

3

2 2

1

9

5 5

6

8

6

4

3

10

7

8

15

12

18 18 18

0

4

8

12

16

20

-94 -95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10

Benelux

France

Germany & AustriaItaly

Nordic

Other

Spain & Portugal

UK & Ireland

6170

110 113

183

286

225

22

7

55

97 97

130135

154

191

171

96

122

191

0

50

100

150

200

250

300

-01 -02 -03 -04 -05 -06 -07 -08 -09 -10

bn

MBS

Covered Bonds

The number ofnew coveredbond issuerscoming to themarket hasincreasedduring andafter the crisis


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Covered Bond Investor Demand Dynamics

Who invests in CBs from which region?

Some CB issuers access a more diversified investor base and are less reliant on domestic investors as peers

Bank treasuries are driving Benelux and German issues while insurance is supporting French issues

Source: GS Analysis. European covered bond issues 2011YTD with available distribution splits (includes 60 deals)

76%

36%

31%

51%

21%

26%

49%

6%

34%

10%

12%

17%

19%

8%

5%

5%

37%

5%

16%

15%

7%

5%

3%

13%

1%

4%

5%

23% 3%

25%

8%

12%

9%

8%

5%

16%

3%

4%

3%

4%

4%

4%

5%

5%

7%

6%

6%

9%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Germany & Austria

France

UK & Ireland

Benelux

Iberia

Italy

Nordic

Germany & Austria France UK & Ireland Benelux Iberia Italy CEE Nordic Asia OthersInvestor Region:

62%

34%

22%

59%

31%

23%

47%

20%

30%

48%

25%

45%

56%

30%

10%

13%

10%

6%

11%

1%

14%

5%

20%

16%

8%

13%

14%

7%

3%

3%

5%

2%

1%

6%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Germany & Austria

France

UK & Ireland

Benelux

Iberia

Italy

Nordic

Banks AM/Funds CB/SWF's Insurance Others

Investor Type:

IssuerReg

ion:


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10

Covered Bond Investor Demand Dynamics

Who invests in CBs with which maturities?

While German investors drive the shorter tenor deals, French and UK accounts support the longer maturities

Bank treasuries buy shorter tenors, Central banks up to 5yrs and Insurance in 10yrs

Source: GS Analysis. European covered bond issues 2011YTD with available distribution splits (includes 60 deals)

46%

44%

43%

39%

12%

12%

11%

27%

7%

10%

7%

17%

3%

5%

10%

3%

7%

4%

1%

4%

4%

8%

4%

2%

1%

10%

10%

10%

5%

5%

4%

2%

1%

5%

8%

7%

4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

x < 5yrs

5yrs x < 7yrs

7yrs x < 10yrs

10yrs x

Germany & Austria France UK & Ireland Benelux Iberia Italy CEE Nordic Asia OthersInvestor Region:

IssueMaturity:

51%

43%

39%

30%

30%

34%

38%

37%

12%

13%

7%

7%

4%

7%

11%

24%

3%

3%

5%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

x < 5yrs

5yrs x < 7yrs

7yrs x < 10yrs

10yrs x

Banks AM/Funds CB/SWF's Insurance OthersInvestor Type:

IssueMaturi

ty:


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II. Covered Bond Jurisdictional/Legal Frameworks


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Covered Bond Jurisdictional/Legal FrameworksOverview

Covered bonds are long-established products in many EU jurisdictions, with well-developed legal frameworks.

No defaults have occurred so these frameworks have not been tested in court.

EU jurisdictions covered in this presentation have legal frameworks based on legislation, Canadian issuance isbased on contractual arrangements.

Approach to segregation differs by country as summarized below:

France, Italy, Netherlands, UK and Canada achieve segregation upon issuance by transfer to a separateentity.

In Austria, Denmark, Finland, Germany, Ireland, Norway, Portugal and Sweden assets are held on balancesheet but separately identified. Segregation is automatic on insolvency of the issuer.

In Spain, noteholders are given a priority claim by a form of legal mortgage over the issuers holdings of realestate.

Most jurisdictions require a third party to monitor the covered assets and to report to the local regulator on aperiodic basis, with the following exceptions:

Austria and Germany only permit changes to the cover pool with the prior consent of the independent monitor.

The issuer performs the monitoring role (with reporting to their regulator) in Denmark, Finland, Spain and theUK.


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Important Notice

The information in this document is confidential and may not be disclosed to any other person without our priorapproval except that, subject to applicable law, you may disclose aspects of any potential structure or transactiondescribed in this document that are necessary to support any U.S. federal income tax benefits and all materials,including tax opinions and other tax analyses, related to those benefits without our imposing any limitation of any kind.

This document is a product of the Goldman Sachs Financing Group and is not research. We have prepared thisdocument based upon information that we believe to be reliable but we make no representation or warranty, expressor implied that it is accurate, complete or up to date and accept no liability, other than for fraudulent misrepresentation,if it is not. Any proposed terms in this document are indicative only and remain subject to contract. Nothing in thisdocument shall constitute or form part of any legal agreement, or any offer to sell or the solicitation of any offer to buyany securities. Goldman Sachs does not provide legal, accounting or tax advice and you are strongly advised toconsult your own independent advisors on any legal, tax or accounting issues relating to these materials. We and our

affiliates may from time to time have positions in, and buy or sell, securities and investments identical or related tothose mentioned in this document and may possess or have access to non-public information relating to mattersreferred to in this document which we do not intend to disclose. No person shall be treated as a client of GoldmanSachs, or be entitled to the protections afforded to clients of Goldman Sachs, solely by virtue of having received thisdocument.

Goldman Sachs International. All rights reserved.

6904327 goldman sachs 4a covered bonds 01 march 11 eldar

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