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What is a covered mortgage bond?
Covered Mortgage Bonds are regulated by Act XXX of 1997 (on Mortgage Credit Institutions and Mortgage Bonds (Jht.)). In Hungary mortgage bonds can only be issued by a mortgage credit institution. The covered mortgage bonds (covered bond) are debt securities, and different from senior unsecured bonds. The special condition for its issuance, i.e the existence of the underlying coverage required by the Jht. is certified by an independent Asset Controller approved by the MNB. Claims in the form of covered bonds never expire against the issuer.
The ‘coverage’ of a mortgage bond is based on a double-layer collateral system: mortgage loans, which are ordinary collaterals, and real estate collaterals pledged behind them. This double collateral system serves the security of the investors, because in the event of the mortgage bank's bankruptcy, the (principal and interest) claims of the mortgage bonds holders have to be satisfied first. Thus, among the creditors, mortgage bond holders are in the first place in the order of satisfaction.
The table below shows the two different coverage levels of the covered mortgage bonds in compliance with the regulations of Jht.:
The strict regulations of the Jht. and other laws provide further protection for the investors:
- Special MNB supervision : Pursuant to the Jht. rules, MNB is obliged to have an inspection at mortgage banks on annual basis.
- Increased transparency: Mortgage banks are obliged to publish the value of outstanding mortgage bonds and the cover pool on quarterly basis. Moreover the Takarék Mortgage Bank semi-annually publishes the quick reports on its previous half year performance, and also updates the Transparency Report on quarterly basis on its website, in line with the requirements of MNB and CRR 129.
- Special resolution rules: Pursuant to the Resolution Act, the creditor recapitalization obligation does not apply to mortgage bond investors, ie mortgage bond investors cannot be obliged to participate in the partial or full satisfaction of other creditors of the mortgage credit institution in the event of insolvency of the mortgage credit institution.
Other risk mitigating factors in relation with the Covered Mortgage Bonds issued by Takarék Mortgage Bank Co. Plc.:
- Minimum 2% overcollateralization (stricter than the requirements of Jht.) in order to ensure the fulfillment of all principal and interest payment obligations on the outstanding mortgage bonds.
- The Mortgage Bank maintains a liquid asset for 6 months on an ongoing basis to ensure liquidity equal to the amount of its principal and interest liabilities maturing within six months.
- As a member of the Integration, pursuant to the Integration Law CXXXV. of 2013, the Integration Organization and its members are jointly liable for their obligations in line with the regulation of the Civil Code. The mechanism for maintaining financial stability significantly reduces the chances of insolvency.
- The Covered Mortgage Bonds issued by the Takarék Mortgage Bank are rated by S&P
Why buy mortgage bonds?
The special security features and risk mitigation factors described above make it attractive to buy and hold mortgage bonds, but in addition to these, there are some point of views that are worth considering for potential investors. The Covered Mortgage Bonds issued by the Takarék Mortgage Bank
- are publicly issued securities.
- offer medium and long term investments, having 3-5-10-15 year tenor,
- are listed on the stock exchange,
- are less risky compared to other similar assets (senior unsecured bonds)
- provide higher yields than government securities