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Sunday, 22 October 2017

Pfandbriefe/Covered Bonds: The start of something new

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After a turbulent couple of years, a beleaguered AHBR has undergone major restructuring. Soon to be renamed COREALCREDIT BANK, the re-branded entity now sees its future position within the German commercial real estate market. Rachelle Horn reports.

Allgemeine HypothekenBank Rheinboden (AHBR) has undoubtedly been one of the most talked about subjects in the covered bond market over recent years. In October 2005, news of a possible closure of AHBR sent its Pfandbriefe into free-fall and spread widening of its mortgage Pfandbriefe was reported to be as much as 32bp in some cases. In fact, so significant was the situation, the Association of German Pfandbrief Banks (vdp) amended its minimum market-making standards.

The resultant turmoil surrounding AHBR led to a discontinuation of market making in the bank’s jumbo Pfandbriefe and, in order to prevent similar cases from happening again, the vdp implemented a revision of the minimum standards required for market makers in the case of exceptional situations and founded the Market Maker and Issuer Committee (MIC).

"The AHBR crisis has shown that the minimum standards for jumbo Pfandbriefe require a permanent review," says an official at the vdp. "The MIC will meet at least twice a year to discuss fundamental questions revolving around market making." The resultant changes included an increase in the minimum number of market makers from three to five, a precise definition of the term ‘usual trading hours’ and the clarification of the required bid/ask spreads on Pfandbriefe with maturities of more than 20 years.

An announcement from Moody's on May 14 saw the agency withdraw all ratings for AHBR on the basis that it believes it "lacks adequate information to maintain ratings". At Ba3/BB-/BBB-, AHBR had previously carried sub-investment grade ratings with both Moody's and S&P. Prior to Moody's decision, its mortgage Pfandbriefe were rated A3/AAA/AA and its remaining public sector debt rated A1/AAA/AAA. In late February, AHBR published earnings figures for 2006, posting a loss, in line with expectations, of €575.1m. The bank is confident that it can come close to breaking even in the current financial year, and aims to return to profitability in 2008.

After a series of restructuring measures, AHBR plans to make a new start. Following a decision taken at the general meeting in June 2007, it will adopt the new name of COREALCREDIT BANK. Under this new guise, the business plans to generate financing volume totaling some €750m. As far as the bank itself is concerned, AHBR sees its future within the German commercial real estate market.

Claus Nolting, chairman of the management board at AHBR says: "AHBR has systematically implemented its restructuring programme, while at the same time developing a new, viable business model. These are the two main pre-requisites for a successful re-launch, which will enable us to draw a line under the past and look with motivation towards the future. Initial experience with our new business model has already confirmed that we have made the right decisions."

AHBR continues to ramp down its business and has conducted a series of buy-backs as part of its withdrawal from the public sector. In 2006, it decided to give up the public sector lending business. To reduce its portfolio in this arena, the bank bought back public sector Pfandbriefe and sold public sector assets. "The public sector portfolio declined from €33.5bn to €18.1bn in 2006," says Axel Leupold of AHBR's strategy and communications department. "For the future, AHBR will also cease to issue public sector Pfandbriefe."

Its new business model focuses on commercial real estate financing within Germany. In terms of AHBR's funding activities, its strategy will become more diversified than it was in the past. "We will use the three different funding channels; syndication, securitisation and mortgage Pfandbriefe," says Leupold. "On the basis of AHBR's good liquidity and the planned new business volume of €750m, the bank does not plan to issue mortgage Pfandbriefe in 2007," he adds.

The restructuring measures focus on the workout of legacy positions and the systematic separation of business areas not belonging to the core business of the new bank, such as international and retail business. This was also accompanied by a headcount reduction.

With its new business model, AHBR is positioning itself as a specialist institution for commercial real estate financing in Germany. The bank aims to set itself apart from the competition with its integrated and capital market-focused range of products and services for professional real estate investors. AHBR's new organisational structure, which has just a single hierarchical level below the management board and a new team of specialists for commercial real-estate financing will enable the bank to provide efficient, rapid and competent customer services.

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