Covered Bonds are a type of investment that combine traditional secured corporate bonds with aspects of asset-backed securities and mortgage-backed securities. Mortgage lenders are their primary users, and they serve as a tool for the process of refinancing. Investors who own covered bonds have a right to a pool of assets owned by the issuer; this gives investors an additional layer of protection.

The bank or NBFC pays investors principal and interest until the bond matures. In the event that a payment is not received, the amount can be reclaimed from the pool of assets. Typically, the cover pool comprises mortgage loans, automobile loans, gold loans, etc.

In contrast to secured bonds, which offer recourse against the issuer, covered bonds offer double recourse. First, it enables recourse against the issuer, and second, it protects recourse against the issuer's assets in the event of bankruptcy (Cover Pool). Therefore, because of the cover security, the credit rating of these bonds is enhanced beyond that of the issuer.

ISSUERS

Issuers of Covered Bonds include banks, corporations, and non-banking financial institutions.

TYPES

Contractual

• These bonds have legislative support, which reduces the likelihood of insolvency.

Legislative

• These bonds get bankruptcy immunity by contractual provisions.

THINGS TO KNOW

• It gives you two ways to get your money back: from the cover pool and from the issuer.
• Thought to be safer than regular bonds because they have an extra cushion.
• The people who own covered bonds have a higher claim on a special pool of collateral assets or the money made from these assets.
• The investors have full recourse to the company that issued the bond. A dynamic collateral pool is used to back up the covered bonds and protect the investors' money.

MAJOR INVESTORS

Investors in these bonds are categorized as ranging from small investors to major institutional investors. These investors choose investments with a long maturity period and are willing to assume minimal levels of risk. Investors include pension funds, central bank, insurance companies, bank treasury, and asset managers.

FINAL TAKE ON INVESTING IN COVERED BONDS

There are many good things about covered bonds that make them appealing to investors. It is a safe investment that gives a good return. The bondholders benefit from having two ways to get their money back. It is safer than securities backed by assets. Even if the institution that issued the bonds goes bankrupt, the investors' money is still safe. Under Dual Recourse, the issuer has to pay investors out of its own cash flow. The interest rate on Covered bonds is a big draw for many investors. The interest rate has been anywhere from 8.90% to 12.75 %.