IFR: And where do DnB NOR bonds trade compared with other jurisdictions?
Achim Linsenmaier: Basically, DnB NOR covered bonds were issued and are trading still more or less around the level of mid-swaps minus 3.5bp. That is very close to the level where German bonds are trading, so this clearly underlines what Thor said, that this is definitely one of the assets where people feel very comfortable in terms of spread, especially this environment.
IFR: When will we see DnB NOR back in the market with a jumbo?
Thor Tellefsen: We have previously communicated that we were aiming to build a curve in reasonable time. We are looking to come to the market this autumn, but we are in a comfortable liquidity situation, meaning that we can sit and wait and take a look at the market. But if the market comes back to reasonable shape, we don't see any reason for delaying it. We have promised investors that we will build a curve and we are aiming to stick to that.
IFR: So what is the outlook for Germany?
Peter Kammerer: It is very positive from our point of view. We have a long-standing history of covered bonds. Pfandbriefe is a very well known product and, in my opinion, it is one of the best products out there in covered bonds. What clearly speaks for the Pfandbrief is its long history: there has never been a default on a Pfandbrief and that is clearly good for the product.
Also, we regularly look to update and modernise the law. It has underpinned the strength of the Pfandbrief and we are very happy as an issuer to be in this jurisdiction and to keep issuing Pfandbriefe. Also, it is an important source for our funding as not only can you issue in jumbo format, but you can issue Pfandbriefe in private placements and as registered bonds. Therefore, you can achieve very, very attractive funding levels and that is something that we are very much committed to.
Regarding the question about when the market will start opening up for issuers, we are a regular issuer of covered bonds and tap the market several times per year with large benchmark transactions. We are always looking at markets and if opportunities come and we feel the timing is right, we will do transactions.
IFR: We have seen a trend towards more private placement issues over recent times. Does this apply to LBBW?
Peter Kammerer: There has been a trend and we have been issuing private placement Pfandbriefe for a long time. It is very attractive and it is a tailor-made product for investors. We have a very strong investor base, we have good relationships with new investors, and that is something which gives you very attractive funding.
Christian Reusch: It is the nature of private placements that they are tailor-made, so if somebody requests a specific or odd maturity or specific sizes, it makes for attractive funding levels. From that perspective it serves all the purposes of the involved parties, be that the issuer or the investor.
Holger Horn: Regarding Germany, I think what could be interesting as well is to see how the volume develops over time, especially looking at public sector covered bonds and Pfandbriefe.
From our perspective, volumes are clearly going down in that area, but some issuers are looking into other markets, trying to get more foreign assets, for example. However, there is hardly any foreign exposure in German pools, though I expect that might increase over time.
Also, the interesting point for us is to see whether the market risk within the structures is being mitigated by hedging or putting swaps into place. It is an important and interesting feature for us to see how risks will be mitigated in the future. Swaps are slowly being put into cover pools in Germany and I expect to see a bit more of that going forward.
Steffen Dahmer: Also, not to forget, there are banks in Germany that are in merger talks at the moment, which also lightens the number of issuers. For example, DG Hypo and Munich Hypo are seriously considering a merger, not forgetting the DEPFA/Hypo Real Estate story. However, it may not necessarily affect the capital markets that much because, using Sachsen LB and LBBW as an example, Sachsen LB is rather small, so it does not use the capital markets that much. That does help in terms of Pfandbriefe or covered bonds out of Germany in general, however, because you simply are losing a few options.
Thor Tellefsen: If I can add a point there for Norway, since Norway is a new issuer of covered bonds. DnB NOR aims to issue €6bn–€8bn on an annual basis, but these are not new mortgages we are creating; these are mortgages already on the bank’s books. The total mortgage market in Norway is around €140bn: most Norwegians own their own houses, so this effectively means that this is a purely refinancing game. We are refinancing senior funding based on mortgages and replacing them with covered bonds.
DnB NOR itself already had eligible mortgages within 75% LTV for more than €40bn and the situation in Norway is such that it will take many, many years before we have to look at anything else than purely prime Norwegian residential mortgages.
Steffen Dahmer: It is a good trading idea. I will tell our credit traders not to short DnB NOR's seniors because they’ll never get them back as you'll never come back into the senior market!
Thor Tellefsen: There are other good trading ideas in Norway. As I said, the Norwegian government only issues a small amount of bonds just to create a yield curve. Interestingly enough, more than 50% of these bonds denominated in Norwegian kroner are held by foreigners, which actually this means that these bonds are trading extremely tightly.
When we priced our first DnB NOR covered bond before the summer, it actually equated to a premium of approximately 50bp over Norwegian government bonds. DnB NOR will also provide the market with covered bonds denominated in Norwegian kroner, so for those who want risk in Norwegian kroner, we also offer a very good alternative given the very low number of Norwegian government bonds.
IFR: Now that investors have far more power, what are the likely repercussions going to be of the recent volatility from both a market-making and an issuing perspective? Will those that now have a less than pristine reputation going to be made to suffer the consequences of their former actions?
Steffen Dahmer: Time will tell. I know that some investors will definitely make sure that their concerns are addressed, be that through roadshows or one to one discussions. Having said that, I would suggest that you will see fewer hot orders and more orders given to the supporters of secondary liquidity and to people that are delivering a better service than others. Issuers will hear the investor feedback and could well react in how they award mandates: hopefully the stronger houses will benefit from that.
Achim Linsenmaier: We heard from a couple of investors that were extremely disappointed about not being able to get prices from some of the market-makers. They mentioned that this is something they will definitely take into consideration in the future when thinking about who they will trade with and who they will not.
Christian Reusch: The only way to make clear that this is something that is part of the trade is that issuers do not reward them with a mandate until they sort out their technical or communication problems. And from the investor’s point of view, not making them part of your order.
We had a call with a number of the German sub-sovereigns two weeks ago, where they made very clear that they understood the economic reasons why this happened. But they also said that there is an agreement, which should be adhered to. There is a bilateral agreement which cannot be cancelled by one party only. I think that is a fair statement.
Thor Tellefsen: From an issuer perspective, I think it is more important than ever. We can always talk about being a prudent borrower, but I think going forward it is extremely important to issue transactions that are properly placed in the market.
To that end, even in the covered bond market you have these so-called bought deals, or league table transactions, but I think we will see less of that in the future. DnB NOR has never had a reputation for anything other than book-built transactions, though internally in the past we have sometimes thought that perhaps we should take advantage of this too and gain a couple of basis points. But, going forward I think it is more important to stick with prudent book-built transactions that are properly placed in the market, because if there are a lot of loose bonds, it is much more difficult for the market-makers to cope with it afterwards.
IFR: With respect to the upcoming issuance window, are we going to see some borrowers struggle to raise their financing in the coming months?
Christian Reusch: Well, the funding mix should not only be covered bonds or senior unsecured: there are several instruments which can be used. At the moment, senior unsecured is probably not the most favourable and RMBS might also be a challenge. So covered bonds, for those that have the ability, might present a good opportunity. There may be a premium required by the investors to get the paper placed but, at the end of the day, if your story is genuine and your product is correct, you will get your requirements done. In short, if you need the funds and you are willing to pay the price, it should be as easy as that.
Peter Kammerer: But as an issuer, if you have Pfandbriefe or covered bonds available, it is easier because you can switch between products and tap the best markets. You can use your deposits, you can use your senior unsecured and you can use your covered bonds to create the best mix of funding.
Steffen Dahmer: In our pitches before the onset of the volatility, I always said that 2007 would see another record year for new issuance. I take that out of my pitches now, I do not see it coming.
Achim Linsenmaier: Why?
Steffen Dahmer: Am I being too negative? I agree that the easiest product to generate size in at the moment is probably covered bonds. But my recommendation for issuers, in line with what we heard from Thor, is that those who can wait should wait. Every bit new supply at the moment could place pressure on spreads. We see HBOS as something of a test case as to how easy or how difficult things are going to be: and only time will really tell.
I expect that some can wait and will wait and others that need to raise the funds will have to accept whatever the market offers. I foresee a reduction in issuance by 20% or 30% versus 2006.
IFR: So for those that can't wait, is it just a question of spread or could the situation arise where people are effectively finding themselves shut out?
Steffen Dahmer: It is just a question of spread.
Christian Reusch: However, we should not believe that every institution is only capable of using one or two instruments for financing. Some have a deposit base and other ways of financing if funding via capital markets gets too expensive.
An institution can also recalculate its new business. If it cannot achieve new business at the higher funding spread, it will have to reduce the amount it does.
Achim Linsenmaier: It really comes down to the funding mix. I think that there is a limited volume that an issuer can do in the covered bond market over the remainder of the year. But, on the other hand, a substantial volume can still be raised overall. I would fully agree that it is just a matter of paying the price if one wants to issue, even in less favourable market conditions.
Many of the issuers are holding huge mortgage portfolios that can be pledged to the ECB as collateral and there are also many institutions servicing a significant part of their asset-funding through savings accounts, which can be increased. So I would not see this developing into a significant crisis at the moment.
IFR: Is the market now shut for certain jurisdictions? Will we see some struggle more than others?
Christian Reusch: That some issuers will struggle more than others is certain, but I would not say that the market is shut for anyone. Currently, a lot of people probably do not completely understand in enough detail what the situation in the US housing market is. US investors are more familiar and are probably a little less concerned: or if they are concerned, they are requesting a price be paid.
For example, we have seen quite heavy senior unsecured issuance in the US over recent weeks in three, five and 10-year maturities and this was easily placed with the investor base. It is just a matter of the market having changed. This has to be accepted and now the question is how to go ahead from here.
In the covered bond world, it might be challenging for a US name to come to the market right now, but I would not say that it is impossible.
Achim Linsenmaier: I would agree, especially with the argument that as long as the senior unsecured market works, why shouldn't the covered bond market work even better?
IFR: Does this also apply to the US investor base, bearing in mind that it is still quite a new product for them?
Christian Reusch: The US houses, or those that have been more involved in US dollar covered bond issuance, could probably say more, but I think that most of the issues were extremely professionally handled and the deals were done properly. It is a very young market and though it is not something that has the same depth as we have in Europe, I am convinced that it will continue.