Covered Bonds under Austrian Law Outline of Legal Framework Dr. Friedrich Jergitsch 27 May 2011

Overview 1. Austrian Covered Bond Legislation 2. Collateral: Mortgages or Public Sector Assets 3. Special Trustee 4. Protection Against Enforcement and Insolvency Priority 5. Set-Off Prohibition

1. Austrian Covered Bond Legislation There are 3 laws under which Austrian issuers may issue covered bonds: Mortgage Bank Act (Hypothekenbankgesetz, “MBA”) Mortgage Bond Act (Pfandbriefgesetz, “PfA”) Covered Bank Bonds Act (Gesetz betreffend fundierte Bankschuldverschreibungen, „CBA“)

1. Austrian Covered Bond Legislation (continued) Covered bonds may be issued as Pfandbriefe or “fundierte Bankschuldverschreibungen” (covered bank bonds) issuers licensed under the MBA or PfA are allowed to issue mortgage or public sector collateralised Pfandbriefe issuers licensed under the CBA are allowed to issue “fundierte Bankschuldverschreibungen” (covered bank bonds). Like Pfandbriefe, covered bank bonds may be collateralised by mortgages or public sector assets two large commercial banks are currently licensed to issue Pfandbriefe under the MBA “special bank” concept established by MBA is, effectively, mute PfA applies to “provincial banks” (Landes-Hypothekenbanken) which (to a substantial extent) continue to be owned by Austrian provinces PfA also applies to the Pfandbriefstelle (a special credit institution authorised to issue Pfandbriefe backed by cover assets which are held by the provincial banks) A number of banks are licensed to issue covered bank bonds under the CBA

1. Austrian Covered Bond Legislation (continued) Division in Pfandbriefe vs covered bank bonds has historical background Recent reforms saw gradual convergence of MBA, PfA and CBA Austrian market expects that a single law will be enacted during the coming years, providing for a single covered bond instrument

2. Collateral: Mortgages or Public Sector Assets The MBA and PfA provide for similar collateral criteria, as follows: Mortgages: 60% LTV; „primarily“ first-ranking mortgages prudent valuation (Beleihungswert), based (primarily) on ability to generate cash and permanent features limits on pre-completion buildings; no quarries or mines properties purchased on default (however, at 50% reduced value) mortgages in the European Economic Area and Switzerland are admitted if the legal and economic position of the Pfandbriefe investors is “comparable”; this is, in particular, the case if their preferential treatment in the issuer’s insolvency is secured Austrian mortgages must have Kautionsband entry in the land register, precluding disposals without the consent of the special trustee PfA criteria are partly contained in the issuers’ articles

2. Collateral: Mortgages or Public Sector Assets (continued) Public sector assets: Loans granted to, or secured by (or bonds issued, or secured, by): —entities governed by Austrian public law —member states of the European Economic Area and Switzerland or —local governments of such states with a risk weight of no more than 20% under Directive 2000/12/EC Derivatives: if entered in order to reduce currency risks, interest rate risks or debtor default risks inherent in the collateral and the issued Pfandbriefe counterparty consent is required to include derivative in the collateral exemption from general set-off prohibition

2. Collateral: Mortgages or Public Sector Assets (continued) Pooling of collateral: eligible collateral of other banks may be used if a written trust agreement is entered to that effect Substitute collateral: to substitute shortfall in standard collateral, the following may be used: —bonds by issuers who are eligible for public sector – collateral, provided they are traded on a regulated market, and subject to cap of 95% of par —cash held with eligible banks substitute collateral must not exceed 15 percent of the total amount of the covered bonds issued at the relevant time

2. Collateral: Mortgages or Public Sector Assets (continued) Minimum amount of collateral: collateral must equal nominal amount of issued covered bonds and must generate interest equal to the interest falling due under the covered bonds in addition, collateral equal to 2% of the nominal value of the covered bonds must be held in assets eligible as substitute collateral (“sichernde Überdeckung”) issuer’s articles may (in addition) provide for collateral to match the covered bonds on a net present value basis

2. Collateral: Mortgages or Public Sector Assets (continued) The CBA’s collateral criteria are similar to those of the MBA and PfA, with only slight differences: In particular, CBA permits use of claims and securities “if they are suitable for investment of money held in trust for a ward of court” (mündelsichere Forderungen und Wertpapiere) This enables the use of (certain) covered bonds as collateral Duty to hold 2% excess collateral applies only where issuer’s articles provide for net present value cover

3. Special Trustee The special trustee has a duty to monitor the sufficiency of collateral Called “Treuhänder” under the MBA and PfA and “Regierungskommissär” (government commissioner) under the CBA Appointed by the minister of finance for a (renewable) tenure of up to five years Must be independent of the issuer and its affiliates Remunerated by the minister of finance

3. Special Trustee (continued) Duties include: to ensure that collateral is duly entered in the collateral register to announce the registration of a derivative agreement to the counter-party to certify, upon the issuance of covered bonds, that adequate collateral has been posted to keep deeds relating to the collateral in safe custody (unless, in the case of mortgages, a Kautionsband entry has been made in the land register) Any disposals of assets used as collateral are subject to the trustee’s prior written consent The trustee is not liable for the economic value of collateral

4. Protection Against Enforcement and Insolvency Priority Only covered bond investors (and derivative counterparties) may enforce against collateral Special insolvency regime: In the issuer’s insolvency, the collateral forms a special pool (“Sondermasse”) which is placed under the administration of a special receiver The covered bonds are not accelerated upon the opening of the insolvency proceedings but should continue to be serviced according to their original due dates Special receiver must administer the pool; this may include taking out bridge funding to meet covered bond maturities Surplus collateral may only be released to the issuer’s general insolvency estate if it is “obvious” that it will not be required to satisfy covered bond investors

4. Protection Against Enforcement and Insolvency Priority (continued) Special insolvency regime: (continued) If feasible, the collateral together with the covered bonds is transferred to another suitable credit institution with the approval of the court and a “curator” appointed to represent the covered bond investors, and following consultation with the creditors’ committee If issuer has opted for early redemption at present value in its articles, and provided that there is sufficient collateral, the collateral will be sold and the proceeds will be used to redeem all outstanding covered bonds at their present value In case the collateral proves to be insufficient, the covered bonds will be accelerated and are satisfied pro rata by the collateral proceeds; any portion of the bondholders’ claims (as they were outstanding when the insolvency proceedings commenced) which cannot be satisfied, may be lodged in the issuer’s general insolvency proceedings as unsecured claims pari passu with other unsecured creditors

5. Set-Off Prohibition The MBA, PfA and CBA explicitly provide that no set-off is permitted against collateral Collateral may only be entered in the collateral register after the issuer has notified the debtor of the entry and the set-off prohibition Failure to make the notification does not affect the statutory exclusion of set-off

5. Set-Off Prohibition (continued) For mortgages, this follows a general principle established under civil law, providing that the debtor has no right of set-off against a bona fide acquirer of the mortgage, unless it had registered its counter-claim Set-off under a derivatives contract, which forms part of the collateral, is allowed in respect of claims belonging to the same master agreement, provided that the entire agreement must be ring-fenced as collateral for the same pool; this applies both before and after a default by the issuer

© Freshfields Bruckhaus Deringer LLP 2011 This material is for general information only and is not intended to provide legal advice.