Sparinvest’s investments in covered/securitized bonds is currently restricted to a universe consisting entirely of Nordic covered bonds, as well as government bonds. These issuers are subject to rigorous regulatory requirements and strong governance systems operating in nations with strong environmental and social legislation. The majority of the securitized bonds held are part of the Danish covered bond system.
The Danish covered bond system is perceived as the most sustainable method for financing property purchase yet invented. In the wake of the sub-prime lending induced crisis of 2007-8 it was held up as a shining example of what a well-conducted mortgage market should look like. In more than two centuries of existence, there has never been a default on a Danish mortgage bond - which is probably attributable to the following factors:
Any entity wishing to issue mortgages in Denmark must meet rigorous regulatory requirements. Mortgage issuers are required to retain all the credit risk on their own books and to perform the servicing functions. Mortgages are funded by the issuance of transparent, standardized bonds, creating a large and liquid market that offers considerable attractions for risk averse investors in search of decent returns. Under the 'Balance Principle', every Danish mortgage is instantly converted into a security, valued at same amount, and the two remain interchangeable at all times. This is especially relevant for 30-year callable mortgage loans that homeowners can retire either by paying them off at par, or by buying an equivalent face amount of bonds at market price.
Because the value of homes, and the associated mortgage bonds, tend to move in the same direction, homeowners have some protection of their equity. In other words, if home prices decline as a result of higher interest rates, the amount that the homeowner must spend to retire a mortgage decreases because the bonds can be bought at lower prices.
Regardless of the above, we still conduct the same detailed and exhaustive assessment of the issuers standards and procedures in dealing with ESG related issues.