Bank of America Corp., the second largest US bank by assets, plans to sell as much as €20 billion ($26.2 billion) of covered bonds in Europe backed by US residential mortgages, according to Standard & Poor's.
The credit rating company assigned a preliminary rating of AAA to the Charlotte, North Carolina bank's program, the second to use US home loans as collateral after Washington Mutual Inc. sold €4 billion of the securities on September 27. Covered bonds are AAA rated securities popular in Europe that use assets on an issuer's balance sheet as collateral, providing investors with a stronger likelihood for recovery and the borrower with a top debt rating.
„The preliminary rating reflects the program's issuance terms, legal structure, and cash flow mechanics,” S&P said in a report yesterday. Bank of America is required to cover interest and principal payments on the bonds, yet if it becomes insolvent the assets are used to pay off bondholders, S&P said. Covered bonds sales should appeal to more US issuers who can use them to lower borrowing costs, diversify their types of debt, and obtain longer maturities that more closely match the lives of the underlying assets, S&P said late last year.
The 1.8 trillion-euro market for covered bonds – which started in 1769 when King Frederick the Great of Prussia needed to rebuild the country after the Seven Years War against Austria and Saxony - finances about 17% of European Union home loans, according to the European Mortgage Federation. (Bloomberg)