Covered bonds provide upside potential

ON BONDS

Royal London's Saj Vaid explains why he expects the convertible bond market to experience dramatic growth.

The two main forms of collateralised debt available to retail banks are residential mortgage-backed securities (RMBS) and covered bonds. Residential mortgage securitisation involves creating a ‘ring-fenced’ special-purpose entity to fund the purchase of a pool of mortgage assets from the originating bank by issuing RMBS. Rating agencies play a critical role; their assessment of underlying mortgage quality and the stresses the pool can endure determines the level of ‘over-collateralisation’ or credit enhancement required for a AAA rating. This ‘structuring’ is important because it sepa...