Romania: New Covered Bond Law

European interest in covered bonds has increased in recent years and, compared with the time when the previous law was passed, the current situation in Romania is much more favourable towards covered bonds as the banks are now holding major mortgaged loan portfolios and Romania benefits from being part of the EU. Interest in this debt instrument has increased in Europe in recent years due mainly to the reliability it demonstrated during the financial crisis and also because the instrument benefits from certain exemptions under the EU Directive 2014/59/EU on the recovery and resolution of credit institutions.

What’s new?

One of the main innovations of the New Law is the significant role it attributes to the National Bank of Romania (NBR) to assess the potential issuer/credit institution, approve bond issuances and provide supervision over compliance with prudential requirements. The NBR has the authority to approve the issuance agent (the financial auditor charged with assessing the legal compliance of a mortgage bonds' issuance). The portfolio administrator is appointed from amongst the financial intermediation and insurance sector entities.

Unlike the previous legislation, the New Law allows the inclusion of derivatives. Receivables from loans guaranteed by government programs (“Prima Casa”) could be included in the pool of eligible assets.
The New Law also provides for the existence of an overcollateralization of 2% and a minimum period of 180 days for covering liquidity requirements, an LTV ratio requirement of 80% for residential real estate loans and 60% for other real estate loans.

In order to ensure the quality of receivables in the pool, the certainty of assignments of receivables, and bankruptcy remoteness, the New Law provides for exemptions from general legal principles. The exemptions for the assignment of receivables and bankruptcy remoteness include:

1. a 45-day limitation period, in which the creditors of the assignor may file for the revocation of the assignment;
2. an exception from the voidable preference in the assignor’s bankruptcy;
3. a 45-day period for the debtors to notify the issuer whether they refuse to waive their set-off rights against the issuer (failure to do so, entails a stay of any set-off rights, as of the registration of the receivables with the Registry of Internal Evidence);
4. protection of the pool of receivables from any proceeding regarding the liquidation of the issuer’s assets; and
5. control of all amounts collected in relation to the pool of receivables by a portfolio manager appointed in the bankruptcy of the issuer.