[In-Depth Review] The Significance of the Successful Issuance of Euro-Covered Bonds

What is the most crucial factor in supplying high-quality mortgage loans? The answer is very clear: high-quality funding. The characteristics of funding are directly reflected in mortgage loans and determine their quality. If the nature of funding and mortgage loans are not similar, risk management becomes difficult. It is like borrowing funds at a high interest rate and lending at a low interest rate, or borrowing short-term funds and lending long-term loans.

Generally, low-interest, fixed-rate, long-term loans are considered high-quality mortgage loans. Low interest rates reduce the monthly interest burden, fixed rates are not affected by market interest rate fluctuations, making stable household financial management easier, and longer maturities reduce monthly repayments, easing the burden and providing flexibility to respond to housing market changes when considering home disposal.

However, for institutions handling mortgage loans, securing funding that matches high-quality mortgage loans is not easy. Investors on the other side of funding carefully evaluate the issuer’s credit rating, maturity, collateral, and business outlook to check for any leakage in debt repayment ability. If the investment does not meet their criteria, they may demand higher premiums or refuse to invest. Therefore, lowering interest rates or borrowing long-term requires continuous effort.

Recently, Korea Housing Finance Corporation issued euro-denominated covered bonds with negative interest rates for two consecutive years. Terms like covered bonds and negative interest rates may be unfamiliar and hard to understand at first. Simply put, it means that the Housing Finance Corporation borrowed money almost for free from overseas investors in Europe and elsewhere based on excellent credit and collateral.

So, is it really possible to borrow money for free? The reasons for negative interest rates are, first, that the European Central Bank maintains its benchmark interest rate below zero to stimulate the economy, and second, the characteristics of covered bonds. Covered bonds are bonds that provide investors with additional collateral of high-quality mortgage loans besides the issuer’s repayment claim to ensure repayment ability more reliably. Investors first claim repayment from the issuer, and if recovery is not possible, they can dispose of the mortgage loan collateral to recover their investment. Because this enhances repayment stability, covered bonds receive a higher AAA rating than the issuer’s credit rating (AA), allowing issuance at lower interest rates and enabling long-term issuance.

Another notable point is that the Housing Finance Corporation’s covered bonds are ESG (Environmental, Social, and Governance) bonds. ESG bonds are used for projects that create environmental or social value. The Housing Finance Corporation has been recognized by external evaluation agencies for supplying policy mortgages focused on low-income households without homes, contributing to national housing stability and improving household debt structure. As investor trust in ESG companies grows and their importance as an investment factor increases, demand from socially responsible investors has likely provided a positive foundation for lowering the interest rates on the Housing Finance Corporation’s covered bonds.

The Housing Finance Corporation uses the funds raised through covered bonds as resources to support mortgage loans for low-income households without homes and has continuously supplied low-interest, long-term, fixed-rate mortgage loans since its establishment in 2004. One of the driving forces behind this is securing stable funding methods by pioneering overseas covered bond markets and steadily lowering spreads (additional interest rates) through continuous promotion of the social value creation of the Housing Finance Corporation’s business and improvements in issuance structure.

Although funds raised through overseas covered bonds currently account for a small portion of the overall mortgage loan market, if the environment to expand this share is provided, it is expected that not only more high-quality mortgage loans can be supplied but also that the system can evolve further.

Seol In-bae, Executive Director, Korea Housing Finance Corporation