8 | ifr special report | December 2008 PFANDBRIEFE ROUNDTABLE
Hagen : I don’t think liquidity is the biggest problem at the moment. In fact it has not been a problem in 2008, even though market making did not function very well. If you look at the new issuance in 2008 from January 2008, compared to the same period in 2007, there was an increase of 23% of Pfandbrief issuance. But what we are seeing is a shift from the products and a move into registered Pfandbrief. In 1995 registered Pfandbriefe was a quarter of the market. Today it is about 35% of new issuance. The investors are also different. One of the backbones of the investor base are investors that are less interested in the liquidity issue, because they are more interested in holding the Pfandbrief on their balance sheets. They are more interested in knowing they will get their money back and get their interest paid.
Dahmer : Another issue is the number of placings in the market. Dresdner Bank and Commerzbank are going to merge, as are Merrill Lynch and Bank of America. There are others too, where you have seen the back books are I would say almost gone. Previously high volume back books hold and used as liquidity portfolios are totally unwound, leaving small secondary books. Whenever you add on a position you try to pass it on to someone else. That is totally different to the world of 2006 and 2007. That's not only different for the covered bond or for Pfandbriefe, it’s for all kinds of Triple A rate products. We have less players, we have less willingness to add to positions and we have almost no back books anymore. It's a totally different approach.
I am now guestimating but I think we are talking about something like up to €100bn of secondary funds that no longer exist.
Bertram : I believe back books are more important for some issuers than in the past in terms of providing liquidity to buy back
some Pfandbriefe. If banks are willing to make a bid on deals of around €550m you are unlikely to see it being bought back.
The registered Pfandbrief was the
only product which allowed issuers to issue in ten-year maturities. That was helpful on the funding side.
If you really want to sell your debt you need to be a bit conservative. The one buying back should not be the most aggressive in the market. If people want to get liquidity and they find one issue which is most aggressive by bid, you could be quickly flooded with some secondary paper.
Engelhard : Registered covered bonds do play a bigger role. This has already been established over the past few years. Still, the overall volume of Pfandbriefe is decreasing to the tune of €60bn over 12 months, which is roughly €5bn per month. This reflects the fact that business models based on wholesale funding are finding it more difficult at the moment. The particular advantage of placing registered bonds, non marked to market, mainly with bank investors, was put into perspective quite recently. On 13 October the IASB decided to amend IFRS7, which means securities holdings can be booked under the loans and securities book. Some banks are making a larger use of that provision already. This has watered down the particular advantage of issuing under the Namenspfandbriefe format to some extent.
IFR: Does the registered Pfandbrief allow issuers to fund with duration?
Huber : Yes. I mean you don't see the same kinds of volumes that we had in the jumbos, but there's constant issuance going on. What I also hear from Pfandbrief banks – the really well established ones – is their traditional domestic investor base say yields on eligible assets are quite attractive. They get very high margins nowadays, so they can, in theory at least, reduce volumes. They still have a good income from the higher margins.
Of course, that can't be a sustainable business model for the next couple of years. But it at least allows you to continue to survive – and show quite good results.
Bertram : The registered Pfandbrief was the only product which allowed issuers to issue in ten-year maturities. That was helpful on the funding side. They mostly went to to insurance companies. We hardly sell any registered Pfandbriefe to other banks.
Engelhard : This is exactly the area where investors may benefit from the steepness of the yield curve, and from their investments in long dated issues – more so in registered bonds but less so in benchmark jumbos.
IFR: So is the jumbo decreasing in importance?
Engelhard : In size, yes. In importance, I don't know.
It depends on whether you are looking at this from an investors' or an issuers' point of view. From an issuers' point of view it is still is a marketplace you can't ignore. It is still very important to satisfy funding needs. From an investors' point of view, too, it remains an attractive product: it is still the largest segment of the covered bond hemisphere.
I don’t think liquidity is the biggest problem at the moment. In fact it has not been a problem in 2008, even though market making did not function very well. If you look at the new issuance in 2008 from January
2008, compared to the same period in 2007, there was an increase of 23% of Pfandbrief issuance.
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