Changes to Czech Law: Implementation of the Covered Bond Directive

The CBD Amendment introduces, amongst other changes, some of the mandatory as wellas some of the optional features of the “Covered Bond Directive” (Directive (EU) 2019/2162) and will enter into force on 29 May 2022.

New statutory liquidity buffer

The CBD Amendment has introduced a requirement that a cover pool must at all times include a cover pool liquidity buffer composed of the liquid assets falling within the categories set out in the Czech Act on Bonds.

The cover pool liquidity buffer will cover the maximum cumulative net liquidity outflow¹ over a period of 180 days. Where the issuer of covered bonds (the issuer) is subject to liquidity requirements set out in other EU acts that result in an overlap with the cover pool liquidity buffer, the provisions of the Czech Act on Bonds regulating cover pool liquidity buffer do not apply for the period provided for in those EU acts.

Amendment to the minimum overcollateralization level

Current requirement remains

The aggregate value of all cover assets included in the cover pool must represent at least 102% of the aggregate value of all debts that are covered by the respective cover pool and thus resulting in a minimum 2% overcollateralization.

Newly added requirement

Expected costs relating to the maintenance and administration of the covered block in the amount of 1 % of the cumulative nominal amount of the covered bonds falling within that covered block will always be added to value of all debts that are covered by the respective cover pool.

Permission from the Czech National Bank

The CBD Amendment introduces a requirement for covered block permission. Consequently, each issuer must, no later than on the issue date of the relevant covered bonds, obtain permission for a covered block granted by the Czech National Bank. The Czech Act on Bonds stipulates conditions for both the granting and removal of that permission.

In practice

Issuers must take the permission process into account as an additional step when preparing for an issuance of covered bonds. The permission from the Czech National Bank will be required also for new issuances of covered bonds relating to an existing covered block (e.g. new issuances under an existing covered bond programme). It is expected that the Czech National Bank will publish a request form for such permission in the coming weeks.

Soft bullet structure

For the first time the Czech Act on Bonds will include an express provision allowing issuers to issue covered bonds with a feature of extending their scheduled maturity for a pre-determined period of time if a specific trigger event specified in the terms and conditions of a series of covered bonds occurs. Only the events stipulated in the Czech Act on Bonds (such as the issuer failing to meet the statutory liquidity buffer or the issuer or the involuntary administrator of the covered block failing to redeem all the covered bonds of the given issue) may be used as trigger events for the purposes of an extended maturity structure feature.

No mandatory asset monitor appointment

The CBD Amendment has not introduced a requirement for the issuers to appoint mandatory asset (or cover pool) monitor. Nevertheless, the issuers are free to do so as was and is the standard approach on international covered bonds issuances.

Mandatory information for investors

The issuers are required to publish information about their covered blocks so that the investors may assess the profile and risks of a particular covered block and carry out their due diligence. The exact scope of the information that must be published on the issuer´s website is stipulated in the Czech Act on Bonds.

Transition period

Covered bonds issued after 4 January 2019 (i.e. after an introduction of the previous major amendment to the Czech Act on Bonds) but prior to 29 May 2022, or covered bonds issued prior to 4 January 2019 which were subject to the voluntary opt-in into the new regime, will have to follow the requirements laid down by the CBD Amendment apart from the (i) 1% requirement in relation to the minimum overcollateralization level; (ii) the statutory liquidity buffer; and (iii) the permission from the Czech National Bank (however they still need to obtain such permission before any new issuance is to take place). In any case, the issuers of such covered bonds do not need to amend the terms and conditions of the covered bonds nor create separate cover pools or covered blocks.

_{¹ All payment outflows falling due on one day, including principal and interest payments and payments under derivative contracts in the covered block, net of all payment inflows falling due on the same day for claims related to the assets in the cover pool .}