UBI Banca Group

C.3 Banking Group – Covered bond operations
Objectives
In 2008 the Management Board of UBI Banca passed a resolution to proceed to implement a
structured programme for the issue of covered bonds designed to produce benefits in terms of
funding while containing the cost at the same time.
In detail, the Management Board performed the following:
it identified the objectives of the programme;
it identified the basic structure of an operation to issue covered bonds in the light of the
legislation and explained and examined the main elements, including the portfolio of
loans, the criteria for selecting them, the structure of the financial transaction and the
relative tests;
it assessed and approved the impacts and the organisational, IT and accounting changes
that would be required. These changes were performed to ensure proper risk management
by the Parent and also by the single banks participating. Account was also taken, in
drawing up the procedures, of the requirements set by regulations issued by the Bank of
Italy;
it assessed the risks connected with the operation to issue covered bonds;
it assessed the organisational and operating structure of the special purpose entity
concerned in order to ensure that the contracts involved in the operation contained
clauses that would guarantee the proper and efficient performance of the functions of the
special purpose entity itself;
it assessed the legal aspects through an in-depth examination of the parties and contract
documents used, with particular attention paid to the nature of the guarantees given by
the special purpose entity and the relations between the issuing bank, the originator
banks and the special purpose entity.
The structure
The basic structure of the operation to issue covered bonds involved the performance of the following
activities:
one bank (the originator) transfers a set of assets with determined characteristics to a special
purpose entity to form a separate set of assets termed a “cover pool”;
the originator bank (acting here as a financing bank) grants a subordinated loan to the special
purpose entity designed to fund the purchase of the assets by the entity;
the bank (the issuing bank) issues covered bonds backed by a primary, unconditional and
irrevocable guarantee given by the special purpose entity to the sole benefit of the holders of
the covered bonds and the hedging counterparties involved in the transaction. The guarantee
is backed by all the assets transferred to the special purpose entity and which form part of the
cover pool.
As part of the structure described above, the UBI Banca Group has launched a programme for issues
of 10 billion euro of covered bonds. The structure that was adopted also allows the transfer of the
portfolios which constitute the segregated assets of the special purpose entity from more than one
originator bank, which are not issuer banks.
To achieve this, a special purpose entity, UBI Finance Srl was formed, which as the guarantor of the
issue performed by UBI Banca acquired a portfolio of residential mortgages transferred to it from
network banks of the Group, which participated in the programme both as originator banks and as
financing banks.
406