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14 | ifr special report | December 2008 PFANDBRIEFE ROUNDTABLE


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sure. But they will certainly comprise some part of the investor base.


IFR: Olaf have you changed your opinion on the product? How much weight do you put into Pfandbriefe?


Pimper : My personal view of the Pfandbrief market didn't change a lot during the crisis. When the whole crisis started I was thinking it was a good time for Pfandbriefe to prove whether it is a rates product or a credit product. Now, after almost one and a quarter years, it has proven that it is very close to rates. When we talk about Pfandbriefe, and the jumbo market in particular, the product was very successful in terms of being taken abroad to other jurisdictions. Those jurisdictions brought their own investor bases into this market. So the traditional German jumbo investor base included investors in all these other covered bond jurisdictions.


By the middle of 2007 there was just too much supply, which those investors were unable to absorb. So now there is a particular need for new investors from other countries for the whole jumbo market.


Volk : I don’t think the whole jumbo covered bond market can operate in the same way in the future. Domestic investor bases are becoming more important and they have different needs. I struggle to see the jumbo covered bond market coming back as it was, as a homogenous product. Investors are becoming much more aware of the differences.


I assume that all these nice jumbo statistics that we continuously prepare may lose importance going forward.


Bertram : So you are talking about recovery of the fittest?





When the whole crisis started I was thinking it was a good time for Pfandbriefe to prove whether it is a rates product or a credit product. Now, after almost one and a quarter years, it has proven that it is very close to rates.





Volk : Yes. It will evolve into more of a domestic product market, as long as there is a divergence between European state government bonds.


Dahmer : There are a number of investors who ask about various parameters like the spread, the tenor and the collateral pool, and if that all sounds good they ask if there is a home market. The answer to Pfandbriefe is always yes, there is. So these international investors tend to buy more Pfandbriefe than UK covereds, for example.


Engelhard : I can’t imagine a Pfandbrief issuer would shut the door if a credit investor came knocking at the door, saying ‘I want to buy some Pfandbriefe.’


Bertram : We would be pleased to talk and sell!





Engelhard : Even in the government bond market, in the current environment pricing is subject to bargaining between investors and dealers, for all participants in the marketplace. It's still hard to see a clear difference between rates and credit products anyway. So I think that needs to be put into perspective. The strong home investor base is still important as one of the major strengths of the Pfandbriefe market. Germany has a current account surplus, as opposed to the deficits of many countries. It is basically a net exporter of capital. It is in a very strong position. All this clearly lends support to the product. All the strengths we have mentioned before are valid points, and I feel that in relative terms the Pfandbriefe market will hold up well, compared to some others.


The change in the investor base is driven not so much by confidence in the product, or a lack of it, or all the credit metrics which are available, or even the people starting to study the business model or scrutinising the cover pools again. It's more about understanding the dynamics of the deleveraging process. A lot of bank investors and central banks in the product, and even real money investors, are faced with a net outflow: either a net outflow of proceeds or a deleveraging. This is driving this whole process much more than any perception of whether this is a credit or a rates product, or whether we are dealing with higher or lower recovery or default risks.


IFR: Louis, I understand there will be a change to the Pfandbrief law. Is that correct? Perhaps can elaborate on any major changes that you are going to implement.


Hagen : First of all, this is an ongoing process. There is a government proposal to


I don’t think the whole jumbo covered bond market can operate in the same way in the future. Domestic investor bases are becoming more important and they have different needs. I struggle to see the jumbo covered bond market coming back as it was, as a homogenous product.





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