Clifford Chance Badea partner Madalina Rachieru-Postolache discusses advising on Romania's first covered bond programme with Rajeeb Gurung
How did the firm win the mandate?
It was a combination of factors, starting with the fact that the team had been involved in the preparation of Romania’s covered bond law. Alpha Bank’s CEO very much supported the new draft. Having helped draft the law, we were obviously the best choice to bring the new legislation to life and our experience assisting with innovative instruments meant we were well placed to introduce these to the local market.
What relevant experience did the firm have prior to taking on the mandate?
I should start by mentioning that we are generally involved in drafting new legislation and introducing new instruments in Romania. For example, we assisted the Financial Supervisory Authority in preparing the global depository receipts (GDR) legislation and we worked on the first transaction involving GDRs in Romania – the Romgaz IPO. Generally we prepare derivatives opinions and are involved in drafting various ISDA opinions on the local market.
We also do first-of-a kind deals. The Romgaz IPO was also the first IPO listed in London and Romania. We assisted Globalworth and NEPI on the first euro denominated bonds listed in Romania. We also did the first corporate bond in Romania some time ago, issued by Raiffeisen Bank.
What was the most challenging aspect of the Alpha Bank issue?
How the deal was structured. Romanian covered bond legislation is based on the German pfandbrief act but Alpha Bank's covered bond programme was governed by English law, so not all the concepts that are regularly met on English law transactions, like trustees, were accommodated by our legislation. We needed to identify innovative solutions that cater for Romanian law while still keeping the English law features of the programme which the arranger knew international investors would expect to see. Additionally, we had to accommodate the expectations of the Romanian central bank, which was quite cautious in its approach because this was the first transaction of this type.
Do you expect the law to be amended now it has been tested with a first issue?
We noticed that various points can be improved and Alpha Bank identified the same issues. From various discussions, I understand the national bank is open to discussing what can be improved. So it may be that law is amended in the future, but at a European level there is a new covered bond legislation which is about to be implemented in all member states. So if the law is amended I think it will actually be an exercise done in conjunction with the implementation of the European legislation. We will then have to see what, if anything, will need to be added to the legislation because some of these issues we identified may already be covered by the European legislation.
The legislation was issued three years ago. Were there any issues with Romania's covered bond legislation that made lenders hesitant to issue a programme?
The delay in seeing the first issuance was not necessarily related to legislation or the willingness of the local players. Unfortunately, immediately after the piece of legislation was implemented the government issued other pieces of legislation targeting retail investors. For example, the so-called Datio in Solutum – a law that allows retail borrowers to hand over their house to banks if they can no longer pay the loan. I imagine this affected a lot of cover pool estimations of all the banks. Basically they knew how many loans and what value they can include in the cover pool but out of that cover pool it was impossible to predict how many borrowers would actually stop the payment and hand over houses. After a while – about a year – it was clear that not many retail investors would use this opportunity so it was easier for issuers, including Alpha Bank, to make better assessments of their covered pool.
That was one reason for the delay. The other reason was that all private financial institutions in Romania at the moment have large amounts of liquidity through their debt customer deposits so they did not need to establish debt programmes.
Do you expect more Romanian banks to establish covered bonds programme?
We are definitely hopeful that this was only the beginning. Some credit institutions have a lot of liquidity in deposits, but it is prudent to also have these programmes in place and be able to access them should they require it. Plus, it allows the expansion of financial intermediation and it also allows stability of the financial system because banks with broad and diversified range of funding tools are more resilient. I think we will see other banks going on the market precisely because they are looking to diversify the range of funding tools they have.
What Romanian capital markets activity do you expect to see in the next 18 months?
At the moment we see a very active debt market, mainly dual listings in Romania and outside. We expect DCM to continue to be very active either in reissuance or refinancing.
On the equity side, more and more local investors/entrepreneurs are exploring the possibility of listing their companies on the local stock exchange, but most of them are only in preparatory stage so deals will be finalised next year.
We hope the State will continue to encourage privatisations because the local market still needs encouragement. Hidroelectrica is about to resume its listing process and hopefully it will access the market in the next 18 months.
We also expect to see the government accessing the international market again this year; we will definitely see one sovereign bond in the market.