Call it German engineering brought to securitized debtinstruments. Covered bonds have been used throughout Europe sinceFrederic the Great of Prussia introduced them in 1769, and theycurrently reach a $3-trillion investor base across that continent.Here in the US, where Canadian and European banks have issued $15billion worth of CBs year to date—a higher dollar value than there-emerging CMBS market has produced thus far in 2010—there’s amovement under way to add them to the toolbox for domesticinstitutions. The idea would not be to replace CMBS (see article onpage 14) but to provide an alternative means of financing.

To achieve anywhere near the popularity in the US that CBsalready enjoy elsewhere, though, the bonds need to be backed by astatutory framework as they are in European nations. These statutesrequire high-quality assets in the pools backing the bonds andregular measurement of each pool’s asset coverage, usually on amonthly basis. Absent such a framework, “our work-around coveredbond structure is more expensive and less efficient,” Anna Pinedo,a New York City-based partner in the capital markets group at lawfirm Morrison & Foerster tells Distressed AssetsInvestor. Pinedo is also author of a legal work on CBs.

“Dedicated covered-bond legislation and public supervision, fromthe perspective of market participants, creates a degree of legalcertainty that regulatory initiatives just cannot replicate,” ScottStengel, a partner with the Washington, DC office of Orrick,Herrington & Sutcliffe LLP, said in testimony before the SenateBanking Committee this past September.