In 2012, crucial developments were seen in the Australian, Singaporean and Korean covered bond markets, while in Latin America the first issuance of a structured covered bond was seen from Panamas Global Bank.
Peter Voisey, a partner at law firm Clifford Chance in London, says banks can typically use RMBS technology to achieve de-linkage of the assets from a banks insolvency and adapt that to give a dual recourse covered bond structure.
Such structured covered bonds have been successful in a number of new markets, not least in the UK, where the market developed several years before laws were brought in.
"I wouldnt be surprised to see other Panamanian banks contemplating following Global Banks lead," says Voisey. "Brazil has potential as it boasts a growing economy and a deep mortgage market where local issuers are keen to access the US investor base with an investment grade product which a covered bond structure could potentially do."
There are growing rumours that a Brazilian covered bond market could develop quickly, partly reflecting a fast-growing middle class that is keen to get on the property ladder and take out mortgages.
But unlike Panamanian covered bonds, which are backed by US dollar denominated mortgages, Brazilian mortgages are likely to be denominated in the local currency.
This means a cross-currency swap would be required for a Brazilian deal issued in dollars the US currency being the preferred option of emerging market investors.
But bankers say this should not pose a problem. "Brazilian mortgages have more margin, so theres more room to manoeuvre to bring dollar deals," says a covered bond banker.
Elsewhere in Latin America there have been developments as far afield as Colombia, Peru and even Chile where lawmakers have put forward proposals for a law.
But bankers and lawyers agree that developments in Mexico are likely to be disappointing. "It is a long story, theyve been talking since 2006," says one banker.
"The Mexican central bank is not interested proposed rules hit with a dull thud there," says a lawyer who has recently visited the country.
Australia shines a light on Asia
Australia has provided a beacon of hope for the Asian region with its big four banks issuing about $40bn in six currencies since November 2011. The next big step for the Australian market will be the development of a funding structure that serves the countrys smaller banks.
Australias policymakers had always envisaged the possibility that smaller borrowers would be able to collectively pool their assets and issue a covered bond, but so far this has proved elusive.
"Club deals were always contemplated in legislation but theyre hard to structure as often banks are uncomfortable with the credit risk of other banks," a UK-based lawyer says.
However, bankers say the putative structure will not be modelled on the now defunct Spanish model, which uses a special purpose vehicle. Instead, Australias small banks could sell mortgages to a specialist bank, which would then issue covered bonds.
This is the mortgage financing model being used by Finlands Aktia Real Estate Mortgage Bank, which is partially owned by 31 unrated saving banks and 36 unrated co-operative banks.
Elsewhere in Asia, the Singaporean regulator is well advanced in preparations, though it remains to be seen whether local issuers will bring a structured covered bond before the law is passed.
In March 2012 the Prudential Policy Department of the Monetary Authority of Singapore issued a consultation paper on a regulatory framework for local bank issuance of covered bonds and final guidelines are due any day now.
But draft guidelines, suggesting local banks would only be allowed to issue the equivalent of 2% of their assets, are likely to remain in place suggesting the entire market can grow to a maximum of $10bn.
Singaporean lender DBS Bank is expected to be first out of the blocks with a deal that it has been working on closely with Deutsche Bank. Bankers say that OCBC Bank and United Overseas Bank may also be considering issuance.
Northeast of Singapore, the South Korean parliament is expected to approve a covered bond law. On October 24, the Korean Financial Services Commission (FSC) published proposals for a Korean Covered Bond Act and set a 40-day public consultation period.
Fitch said the proposed Act would help to develop the market, noting that it included many provisions similar to covered bond legislations in Europe.
The Korean Housing and Finance Corporation is the only borrower able to issue covered bonds under its own law.
Meanwhile, in India, a working group in October outlined an innovative framework for introducing structured covered bonds. The National Housing Bank (NHB) a wholly owned subsidiary of the Reserve Bank of India commissioned the working group in 2011 to investigate funding residential mortgage lending.
The group recommended that the NHB should act as a special purpose issuing entity and combine the flexibility of a structured approach with the backing of a national agency.Progress on a Japanese covered bond market is further behind. The Development Bank of Japan is pushing for the creation of a study group. The state-owned lender is particularly keen on covered bonds, because it does not have the ability to take deposits.
Canadians help themselves as US law drags on
The US market will therefore continue to be dominated by foreign issuers, and particularly the Canadians, who will no doubt be quick to follow RBC in registering their programmes with the SEC.
RBC was the first bank to register its covered bond programme with the SEC and issued its first SEC deal in September 2012, a $2.5bn five year. SEC registered bonds typically appeal to a broader universe of buyers than 144A issuance.
The resulting increase in demand helps to lower the cost of funds. RBCs first SEC deal saved the bank around 10bp compared to 144A issuance, equivalent to $2.5m per annum, or $12.5m over the lifetime of the bond.
The other Canadian banks are the obvious candidates to follow RBC, not just because of their proximity to the US, but also because they are the most likely to issue sizeable dollar volumes.
Higher dollar issuance volume means that the prospective savings from having an SEC registered programme are likely to be commensurately greater.
"We expect a number of Canadian Banks will follow RBC with covered bonds that are either SEC registered or exempt from registration pursuant to Section 3(a)(2) of the Securities Act," says Lawton Camp, a partner at law firm Allen & Overy in New York.
The Canadians will be particularly keen to contain the cost of funding which, all things being equal, is expected to rise in 2013.
This is because the prospective Canadian covered bond law, which is due to surface in the first quarter of this year, forbids the issuance of bonds backed by mortgages that have been insured with the Canadian Mortgage Housing Corporation (CMHC).
The CMHC is an agency of the state, so bonds that are secured on loans it guarantees are viewed as exceptionally low risk. That perception of low risk translates to a cheaper cost of funding compared to deals that are backed by uninsured mortgages.
Canadian issuers will therefore be keen to re-coup the expected increase in the cost of funding from uninsured issuance by applying for SEC registration, or 3(a)(2) exemption.
For European issuers, SEC registration is less compelling but cannot be ruled out.
Peter Voisey, a partner at Clifford Chance in London, says that the 144A market has so far provided what the Europeans have wanted.
However, he believes that the more SEC registered covered bond deals there are, the more probable it is that there will be a significant expansion of the US investor base.
In that context, "it could make perfect sense for the Europeans to follow and access a much wider US investor base than the institutional 144A market," he says.
With more and more foreign issuers tapping US investor demand, it is difficult to see how the US authorities will continue to turn a blind eye.
"Every time there is a new development in the Yankee market, it is likely to catch the attention of Congress, who will see that foreign banks are enjoying a competitive funding advantage relative to domestic issuers" says Jerry Marlatt, a partner at law firm Morrison Foerster in New York. "SEC registration shows that one arm of the government is giving its blessing to covered bonds but [the other] is saying domestic banks cannot issue".
It is far from clear that the US authorities and domestic issuers see the need for covered bonds. The GSEs provide cheap financing, and until they are wound down covered bonds cannot compete on an equal footing.
"A number of regulators have indicated that covered bond legislation should be considered in connection with the reform of the entire system for mortgage finance," says Camp.
And, if covered bond legislation is tied to general mortgage finance reform, legislation could be delayed beyond 2013.
But the US housing market has already started to stabilise and Marlatt believes the stronger it gets, the more likely it is that the GSEs presence could potentially be withdrawn "in a gradual and staged way without adverse effects".And if that were to happen, local issuers would be incentivised to look at other funding solutions including covered bonds.