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

To achieve anywhere near the popularity in the US that CBs already enjoy elsewhere, though, the bonds need to be backed by a statutory framework as they are in European nations. These statutes require high-quality assets in the pools backing the bonds and regular measurement of each pool’s asset coverage, usually on a monthly basis. Absent such a framework, “our work-around covered bond structure is more expensive and less efficient,” Anna Pinedo, a New York City-based partner in the capital markets group at law firm Morrison & Foerster tells Distressed Assets Investor. Pinedo is also author of a legal work on CBs.

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

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.