Pfandbriefe/Covered Bonds 2007: Branching out
Having made its debut in the jumbo covered bond market at the beginning of 2006, Aareal Bank has become a familiar name on the covered block having followed this up with another mortgage-backed jumbo this year. Once again, investors proved receptive to the attraction of a very broad international cover pool that stands out for its diversity against those of many of its peers. Andrew Perrin reports.
Aareal Bank’s ongoing strategy of expanding its investor base was nowhere better exemplified than in its recent €1bn February 2010 mortgage-backed transaction.
Spearheaded by Barclays Capital, Dresdner Kleinwort and DZ Bank, it commanded €2.2bn of interest, thus paving the way for pricing through the initial spread guidance at mid-swaps less 5.5bp. Notable was the large portion that was placed with accounts outside the borrower’s domestic market at over 40%. Many of these buyers were gaining exposure to the borrower for the first time and included some central banks in Asia and European funds. As well as the diverse collateral pool, which encompasses 15 countries, this was also a reflection of a comprehensive marketing period that saw Aareal embark on extensive roadshows in new jurisdictions such as Asia and Southern Europe.
But it is not just in this format that it has spread its wings: it has also reached out to new investors through the private placement market, having sold reverse enquiry-driven covered bonds in sterling, yen and Swiss francs this year. These follow on from an inaugural foray into the domestic Swedish covered bond market last September when Sk1bn of local currency was taken out of the market.
“Reverse enquiry-driven private placements will remain an important funding tool as they allow us to get the right mix between currencies, maturities and investors. This reflects our international business model, as these deals are not arbitrage driven but match our mortgage lending in these markets,” noted Tammo Diemer, director and head of capital markets at Aareal. He was also keen to note that an inaugural jumbo public-backed issue could be added to the mix, possibly as soon as later this year. “In order to maintain a presence in the [jumbo] market, we will issue one or two deals a year in the future to accommodate investors. This could include at least one public sector-backed transaction should market conditions be favourable at the time.”
This will contribute to the group’s overall annual capital market requirement of €4.5bn–€5.5bn, around half of which will be raised through the senior, unsecured market and the other half via covered bonds. Aareal Bank raised €2.4bn in the first quarter of this year of which €1.1bn was privately placed. Annual redemptions total around €3bn against a total loan portfolio of €22bn. To date, mortgage Pfandbriefe account for a 19% share of the group’s total outstanding funding, while public sector Pfandbriefe make up some 12%. The balance is made up by senior private placements at 50%, senior benchmarks at 12% and subordinated debt at 7%.
Apart from establishing itself as an accomplished issuer, Aareal Bank also has another reason to smile, having rapidly reduced its non-performing loan portfolio and restored its business back to a growth path last year. “In previous years we were happy to capitalise on the US bid for German real estate assets by selling and reducing our non-performing portfolio. This has now been completed and our strategy is to use our freed-up capital to spearhead anticipated annual growth of 8%-10% going forward,” Diemer said. A couple of sectors that have been particularly earmarked to promote this growth are the US and, to a lesser extent, Asia. “We are no stranger to the US, where we started our international real estate lending business some eight years ago, while we also see scope to expand our lending in Asia, with Japan a probable starting point. The challenge is to identify the right time to enter into these markets,” continued Diemer.
The recent melt down in the US sub-prime market should not hamper this upbeat forecast for growth, he maintained. “We are not exposed to the US sub-prime market but are mainly active in hotel lending. We have analysed the potential implications of the US sub-prime crisis on our portfolio, and our conclusion is that we will not be affected. A more relevant benchmark for our business is hotel occupancy rates, which have risen and should continue to do so.”
The lender also has other reasons to smile, as it targets growth in overseas markets that should bolster its already internationally diverse portfolio of loans.