Amendment of the Act on Bonds: Covered bonds, role of security agent and other significant changes

At the beginning of this year an amendment of the Act on Bonds (Act No. 307/2018 Coll.) became effective. The amendment adjusts the Act on Bonds to correspond with the EU regulation on prudential requirements for credit institutions and investment firms (CRR), but also provides for other changes applicable to a broad scale of bonds.

A new category of covered bonds was introduced in the Act on Bonds. Covered bonds are securities issued by banks, which are secured at least up to 102 % of the debt and which comply with additional requirements for portfolios under the CRR regulation. In the past, the only offical type of bonds in this category were Mortgage Pledge Bonds (in CZ: "hypotéční zástavní listy"), which are a specific Czech type of bonds issued by banks.

In relation to the covered bonds, the amendment introduces a role of security agent – a person, who exercises the rights arising from the security in its own name and to the benefit of all bonholders. The same role may also be filled by the existing "common representative of bondholders", who no longer needs to own any bonds from the issue. The act strives for professionalism in both roles. Both the common representative and the security agent will be obliged to perform their obligations with due professional care in accoordance with the decision of the bonholder meeting and a written contract with the issuer. The agency will be obligatory and exclusive. To the extent the bondholder rights are exercised by security agent or common representative, such rights may not be exercised by individual bondholders or their own agents.

In addition, the amendment also introduces changes, which will affect "standard" bonds and their holders and issuers. Obligatory contents of the issue terms now include repayment rules of subordinated bonds. Rules for the exercise of bonholder rights were adjusted. And a new preclusion period will be applied to the right of the dissenting bondholders to claim premature repayment of their bonds.

Given the scope of changes, it is strongly recommended that issuers review and adjust their issue terms.