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Chinese Cola?

11 November 2016
Richard Kemmish

The covered bond investor council used to have a so called ‘COLA’ working group, standing apparently for ‘Covered Bond Look Alike’ – I couldn’t work out how that acronym worked either. It was a good idea, a group of investors discussing the bonds which aren’t exactly covered bonds but share some of their DNA with the sole outcome of increasing levels of clarity where there is currently confusion. I don’t think it has been very busy recently, after a few tantalising trades – contract law bonds, bonds backed by SMEs or export credit guarantees for example – their business dropped off, presumably as ECB liquidity became so ridiculously cheap. This may be about to change.
The recent ‘Green Covered Bond’ launched by the Bank of China might presage a new wave of COLAs. In case you missed it, this was a full recourse bond backed by a portfolio of ‘climate aligned’ domestic Chinese bonds. Climate aligned here means eligible for the Chinese climate aligned bond index which has some fairly significant differences from the Green Bond Principles that are the touchstone for most of the western green bond market. 
Those, definitional points out of the way, is it a covered bond?
Yes, if you think of covered bonds as a technique, no if you think of it as a trade mark.
Easiest one first: it clearly doesn’t meet the EU legislative definition of a covered bond at least because of the underlying assets not being eligible under the capital directive and the non-EEA issuer not being eligible under the UCITS directive. Other features I can-not comment on as I couldn’t get hold of an offering circular. Whilst this might matter slightly for some investors, for risk weigh purposes for example, I suspect that it is irrelevant for the vast majority of investors. The fact that it was a dollar denominated bond and that 72% went to Asian investors says that the treatment under EU law is pretty irrelevant. So I won’t comment on whether the EU law is likely to change on these points anytime soon.
But if you think of covered bonds as a technique (more accurately a collection of structuring techniques) then clearly this bond had covered bond like qualities and shares much of the DNA of our market (again I can’t comment on the detail). Combine that with one of those old fashioned positive yields and this is a bond that would have been well received by traditional covered bond investors if it had been in euros. An off index bond, certainly. But defensible from a credit point of view and a way higher yield. Perhaps the next trade will be in euros?
I don’t think the green bond market has an equivalent of the COLA group that can opine on the ‘climate aligned’ definition. But this is clearly a bond that both the covered bond and the green bond market need to look at very closely. We are going to see a lot more of this sort of thing.

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