Mitigating Covered Bond Extension Risk

Mitigating Covered Bond Extension Risk

One of the problems from the popularity of soft-bullet maturities is that in the process of adapting it in different countries, there has been diversity about the finer details. In the final part of his Covered Bond series, Richard looks at how long the extension period should be, what interest rate is applied during the extension and which remedial actions must be taken.
Overview

A prevalent issue with covered bonds is the refinancing risks that arise from mismatches in time between when assets pay down and the fixed maturity date of the bonds – to mitigate this, structures such as soft bullets and conditional pass throughs are used.

Key learning objectives:

  • Define natural hedging, pre-maturity tests and refinancing gaps

  • Explain how conditional pass throughs and soft bullet structures mitigate extension risk and their drawbacks

  • Identify the features of extensions

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Summary
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Expert
Richard Kemmish

Richard Kemmish

Richard is a consultant working mainly in the covered bond market. He helps Finance Ministries and Central Banks in countries without covered bond laws to put legal frameworks in place. He has also helped the European Commission with their legislative agenda for covered bonds and related products.

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