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Thursday, 14 December 2017

Pfandbriefe Roundtable 2009

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There was a time at the beginning of 2009 when some analysts were unwilling to put a figure on potential jumbo issuance. Others went so far as to suggest that the first half of the year would not bring any jumbo issuance whatsoever. And for some jurisdictions, they were right - but not where Pfandbriefe were concerned.

For though the secondary market is still a shadow of its former self, jumbo Pfandbriefe had begun to make a tentative comeback long before the ECB's infamous intervention (although, with an active private placement market, the asset class never actually went away).

Indeed, a few brave market participants dipped their toes into the jumbo waters as early as February at levels that were unthinkable only a few months previously. But the market soon began to benefit from more positive economic indicators, and with the onset of spring came a stronger stock market and a recovery of senior unsecured spreads.Pfandbriefe soon caught on to the craze, tightening without any counter-movement as the return of risk appetite and the hunt for yield opened the way to improving funding levels.

With this in mind, IFR brought together key participants from a number of sides of the industry (asset and liability management, strategy, funding and primary and secondary trading) to pose the question: was the ECB’s €60bn purchase programme really necessary for Pfandbriefe, given that it was the best performing member of the covered bond family?

The ECB had set three goals: a tightening of spreads, the resumption of issuing activity in the primary market and a revival of activity in the secondary market.

For the latter, even the staunchest protectors of the Pfandbrief would concede that there is still a long way to go before transparency and liquidity return to anywhere near pre-crisis levels. As for the primary market, the improved marketability of transactions has undoubtedly allowed issuers from even the lower end of the scale access to jumbo funding. With respect to spreads - where covered bonds had lagged the recovery seen in other markets - the ECB’s action significantly accelerated the tightening. To that end, the overall consensus was that Pfandbriefe were on the right track, but that without intervention the road to recovery would surely be a long one.

But at the time of going to print, some Pfandbriefe were already back to pre-Lehman levels. With some reports of investor fatigue at the tighter levels, the German sector could hit the buffers where further spread potential is concerned.

Meanwhile, the attention soon turned to the rating agencies, which have cast a dark cloud over the covered bond market for much of the second half of this year. Among the issues raised was the increasing use of complex measures from the securitisiton world, as well as the increased linkage between the covered bond rating and the stand-alone rating.

Also threatening to spoil the party was the creation of the government-guaranteed market, which, it was feared, could stifle investor demand for Pfandbriefe. But only six banks utilised the scheme, and GGBs have already been labelled "the forgotten asset class". Indeed, as the months wore on, it became increasingly apparent that the two would not co-exist, and that covered bonds could well be the exit strategy for those that had previously been unable to access the capital markets.

 

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