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June 2009 | ifr special report | 15 PFANDBRIEFE


Pfandbriefe in the aftermath


Like all covered bonds, the German Pfandbrief market has faced tough competition from a relatively new kid on the block: state guaranteed bank bonds. This, coupled with continued aversion to bank risk in general, prompted a serious decline in jumbo covered bond issuance. But dig a little deeper and figures show that this jurisdiction has actually maintained a stable source of refinancing for its banks. Rachelle Horn reports.


of Pfandbriefe, Germany’s highly prized covered bond market, must not be under- estimated. But few asset classes have come out unscathed from the crisis, and despite being widely regarded as the strongest of all covered bonds, Pfandbriefe have been no exception.


W 600 500 400 300 200 100 0 95 Source: RBS, Bundesbank 96 97 98 99 00 01 02 03 04 05 06 07 08


Registered Jumbo


Smaller sized bearer


In the first quarter of this year, only €3.25bn of jumbo Pfandbriefe (excluding taps) were publicly issued in the market – a staggering 62% less than the same period


ith a total outstanding volume of some €800bn – roughly one fifth of the entire German bond market – the importance


of 2008. Post-Lehman brothers risk aversion to most bank related debt, and the dramatic rescue of Hypo Real Estate – Germany's second largest issuer of Pfandbriefe – accounts for some of this decline. But it was the newly created government guaranteed bank bonds that stuck the final nail in the coffin. While jumbo Pfandbrief volumes have been on the decline, issuance of government guaranteed bank debt has soared. During the first three months of 2009, such issuance amounted to €21bn in Germany, providing stiff competition for investors' attention. Of the three jumbo German covered bonds that were placed in


Outstanding volume of all pfandbriefe, by funding format €bn


Q1 this year; all were in a five-year maturity.


Demand prior to this had been concen- trated in the short-end of the Pfandbrief curve. Since the onset of the GGB market, this part of the curve has suffered an erosion of demand.


Despite the impact on the Pfandbrief asset class, in mid-February Germany's federal cabinet agreed on a new local law that would extend the Financial Market Stabilisation Act. As part of the move it granted an extension of the maximum maturity for government guaranteed bank bonds to up to five years, putting further pressure on jumbo Pfandbriefe. The Government’s motives are as clear as they are credible: to align the framework conditions in Germany with those in effect across Europe and prevent distortions of competition. The draft law extends the maximum guarantee term from the current 36 months to 60 months, thus following the EU commission's policy regarding state aid, which permits a term of between three and five years for one third of guarantees. Yet the move flies in the face of a very clear warning from the Association of German Pfandbriefbanks (vdp) that it will further increase competition. "The issuers accept the inevitable distortions that government-guaranteed unsecured bank bonds create in the capital market," said Henning Rasche, vdp president. "But a widening of the scope of such guarantees would result in an unfair disadvantage for Pfandbrief sales."


Covered bond analysts at BayernLB have supported this argument. Under the new


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