Germany 2006 Mixed picture
With around €25.5bn issued in Q1 2006 compared to €22.2bn in the same period last year, jumbo pfandbriefe issuance has improved but Germany's poll position in the European covered bond sector is slowly being eroded. Spain is leading the charge and others like the UK are picking up steam. However, jumbos aside, there are still pockets of growth in Germany, notably for prospective mortgage-backed landesbank supply and in the private placement market. William Thornhill reports.
Recent news that AHBR is to buy back four of its mortgage-backed pfandbriefe is only the latest evidence of the shrinking German jumbo covered bond market, though for those who were skilled enough to short such issues at the right time, trading the asset class remains lucrative. At one point, AHBR's pfandbriefe had been trading around the mid swaps plus 30bp area, but they have since tightened to low single digits with the buy-back level of plus 2bp seen as a fair.
Apart from AHBR's restructuring, the loss of state guarantees has also had a negative impact on supply, notably of public sector pfandbriefe. This is because senior unsecured savings bank debt is no longer eligible as collateral backing for these bonds. According to Barclays Capital covered bond analyst Fritz Engelhard, the jumbo public sector is declining by about €30bn a year as paper is redeemed. The total outstanding jumbo German public sector market is now thought to be around €280bn.
The jumbo sector is also likely to be negatively affected by the impact of the IAS39 accounting rules. Provided an issue is structured as a "namens pfandbrief", the bond can be treated by investors more like a loan. This means there is no need to adopt mark-to-market accounting standards, making the assets look particularly attractive if the investor's aim is to maintain balance sheet stability. Stock market volatility has driven pension and insurance funds to seek such stability.
"Some insurers have up to 95% of their portfolios in namens issuance," said HVB covered bond analyst Florian Hillenbrand.
The loss last year of the specialist banking principle has been a catalyst for consolidation in the sector, with several banking groups merging their specialist issuing entities into the parent.
Although not related to the loss of the specialist banking principle, the merger of Eurohypo and Commerzbank is also a significant development. Commerzbank now owns Eurohypo, EssenHyp, EEPK and the Polish unit Rheinhyp-BRE Bank Hipoteczny. While this latest merger is viewed as neutral for pfandbrief issuance, it is likely that counterparty credit lines will become more challenging. Banking regulations do not permit an exposure of more than 10% to any single banking group, but analysts say assets of the combined entity slightly exceed 10% in the iBoxx index. While it is possible that established investors could be close to filling their credit lines, distribution breakdown of recent deals continues to suggest new investors are being found for this asset class, suggesting that counterparty credit lines are less of an issue today.
In other areas, the prospects for growth look better. Nowhere is this more true than in the landesbank sector, where institutions, that have a strong relationship with their local saving bank community, are likely to grow their business.
Institutions such as LBBW, HSH Nordbank and Bayern LB are ready to take advantage of last year's legal developments on the refinancing register. Aside from encouraging true-sale securitisations, this legislation will enable savings banks to pledge mortgage assets to landesbanks. The landesbanks can then pool the loans from several savings bank to issue a jumbo mortgage-backed deal.
The legislation’s main purpose is to provide beneficiaries (such as noteholders) with insolvency-proof access to the seller’s assets and collateral. The register will allow the creditor to claim the originator’s assets in the event of the latter's insolvency, without needing to transfer the relevant collateral.
Three associated pieces of sub-legislation still need to be approved, but should be in place by early July.
In another interesting move, the German Association of Mortgage Banks (VDP) and the French-based ACI (which represents money market, foreign exchange and bond traders) are shining a spotlight on market making agreements. They have formed an interest group, drawing on members from the commercial, landesbank, co-operative and foreign banking sector who all trade covered bonds. This committee is charged with defining what constitutes a 'fast market', so it can pre-define a rules-based system that would allow players to suspend the market making agreement under certain specific circumstances. The catalyst was a temporary, unofficial suspension of market making in the wake of AHBR's restructuring.