It looks like our recap on covered bonds came not a moment too soon. Representatives Scott Garrett (R-NJ) and Carolyn Maloney (D-NY) teamed up this week to co-sponsor the bipartisan H.R. 940 (pdf), the United States Covered Bond Act of 2011. The new bill is much in keeping with the recently distributed discussion draft (examined in a recent Dechert OnPoint (pdf)). Currently, it is in committee before both the House Committees on Financial Services and on Ways and Means.
Again, the crux of the legislation is certainty on the treatment of covered bonds in the insolvency or receivership of the covered bond issuer. The bill seeks to provide this certainty through a framework that, at certain points in default or insolvency, isolates covered bond programs’ cover pool assets and liabilities into separate estates by the operation of law. Generally, the issuer (or receiver) retains a claim to the residual interest in the cover pool and the bondholders retain claims (contingent in receivership) for deficiencies on their bonds.
Before receivership, if an issuer defaults on a covered bond program, a separate estate is created. If appointed receiver before an issuer default, the FDIC has the option to transfer a covered bond program to an eligible issuer within 180 days or to elect to cease performance. If the FDIC (i) fails to transfer the program within the 180 days, (ii) elects to cease performance or (iii) fails to perform, or cure any arising issuer default, on the program, a separate estate is created. A separate estate is also created for a covered bond program if anyone other than the FDIC is appointed as receiver, trustee, conservator, etc. for the issuer.
The new bill will of course be the big theme at today’s covered bonds hearing before the House Capital Markets Subcommittee, chaired by Representative Garrett. You can find the witness list and access to their testimonies and the webcast (as posted) here. We will be looking for clues in how it is received as to how far it will go or whether, in the end, it will be just another bill on Capitol Hill.
By Stewart McQueen and John Bumgarner.