Brexit could knock a hole in the $1.4 trillion market for euro-denominated covered bonds, if collateral from Britain can no longer be used in European issues of this debt.
In this market, lenders use mortgages, commercial loans and public-sector debt to back payments on bonds. Covered bonds are a cheap form of finance across Europe.
In the European Union, the market is closely regulated by national watchdogs and trade organisations, and their rules set parameters on where the collateral must come from.
With its vote last month, the U.K. may have stepped out of those parameters.
European banks have been able to package U.K. assets into covered bonds on the basis that the country was a part of the European Economic Area.
In Germany’s Pfandbrief market, one of the largest covered-bond markets in Europe, collateral pools of domestic bond issuers include almost €10.2 billion of British assets, according to data by NordLB. Most of those assets are commercial mortgages, export credit and aircraft loans.
The U.K. has voted to leave the EU and may not afterwards join the EEA, which has access to Europe’s common market, given that would mean having to accept free movement of people, a key bugbear for many of those who voted for Brexit.
Lawyers are also asking what that may mean for outstanding bonds that have British assets as collateral.
“Grandfathering is the only practical solution for existing Pfandbriefe featuring U.K. collateral,” said Vincent Keaveny, a partner at law firm DLA Piper.
This could involve authorities publishing guidance that exempts outstanding German covered bonds from collateral location rules.
SOURCE: Wall Street Journal
