FDIC's covered bonds policy might give it too many options for insolvent issuers, Sifma panel says

By Sheri Kasprzak

New York, Sept. 27 - When it comes to the Federal Deposit Insurance Corp.'s options for insolvent covered bond issuers, it might just have too many to choose from, according to panelists at the Securities Industry and Financial Markets Association's U.S. covered bonds conference held in New York Monday.

Legislation and regulation, some of the panelist agreed, might take away some of the confusion and provide a basic framework for handling insolvency in the U.S. covered bonds market.

The FDIC's current policy statement gives it three options when it comes to insolvent issuers of covered bonds. The corporation can keep the bond program going, put an end to the issue by paying off the bondholders up to the value of the pledged collateral or allow the trustee to take control over the cover pool to liquidate it for the bondholders' benefit.

While the statement might be an important step toward creating some specifications for addressing insolvency in the covered bonds market, Scott Stengel, partner with Orrick Herrington & Sutcliffe LLP, said a regulatory and legislative framework must be installed to protect bondholders and issuers.

"There is a great need for legal security in the U.S. because of our debtor-friendly insolvency laws," Stengel said.

Legislation proposed earlier this year by Rep. Scott Garrett (R-N.J.) would provide an automatic stay of 45 days on top of the 180 days the FDIC already grants itself to make a decision on which of the options to choose. The problem with this, said Sean Davy, Sifma managing director, is that it gives the FDIC a total of 225 days to make a decision, and this leaves the creditors unable to collect collateral attached to the bonds.

Another problem with the FDIC's current policy statement, Davy said, is that it provides the option to accelerate the bonds - or not.

"They're going to look at the economic side [of keeping the bonds going], and it seems like it's one too many choices," Davy said.

Even so, Stengel noted that the legislation has been proposed to provide a basic framework.

"What the legislation is designed to provide is a foundation for legal certainty," he said. "I don't think we need or want that much legislation."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.