DBS to enjoy lower funding costs with maiden covered bond program: Moody’s

It’s stable but extremely flexible.

DBS will enjoy a new source of low-cost and stable funding with the launch of its maiden covered bond program, Moody’s Investors Service said today.

"Though DBS' initial issuance volumes may be small, covered bonds provide it with a new funding option that could prove valuable in the future if market conditions turn less beneficial than they currently are," said Simon Chen, a Moody's Vice President and Senior Analyst.

The program will use mortgage loans originated by DBS that are secured by private residential properties in Singapore to guarantee the bonds. DBS will also establish a special purpose vehicle (SPV) to hold the cover pool asset

But apart from transferring the assets from the issuer to the SPV by equitable assignment as is done in other countries, DBS' program also uses a trust structure with DBS as trustee holding a large portion of the loans in the cover pool for the benefit of the SPV.

This trust structure, whose use was confirmed by the June regulatory amendment, preserves banks' priority to enforcement proceeds of the mortgage when borrowers are using their savings under the Central Provident Fund (CPF) to fund down payments and service the loans.

Moody’s said that this unique feature greatly increases flexibility for banks to include loans funded through the CPF in cover pools.