December 2008 | ifr special report | 3 PFANDBRIEFE ROUNDTABLE
IFR: Why did Pfandbriefe contain its spreads so long after the market crisis?
Fritz Engelhard, Barclays Capital : Firstly there is a strong domestic investor base. That has helped the Pfandbrief market a lot. Secondly, it's one of the most established products across the spectrum of covered bonds. And thirdly, it was expe- riencing shrinking supply, particularly at the jumbo level, while some of the other covered bond markets were seeing supply growing quite strongly.
Olaf Pimper, Dresdner Bank : The first markets to be impacted were those with problems in their mortgage markets. Unlike other countries, Germany is not facing such problems right now.
Bernd Volk, Deutsche Bank : From my side, 75% of the market still comprises public Pfandbriefe – public sector backed collateral or public sector collateral. The in- ternational mortgage-market crisis ensures public sector Pfandbriefe are perceived as a safer option. To elaborate on the supply trends Fritz mentioned: in 1998 we had €257bn of Pfandbriefe issuance; in 2007 we had €135bn. So a declining trend.
Louis Hagen, vdp : Pfandbriefe have a very strong legal framework which has been established for over 100 years. Issuers have a broad diversity of different products available, from registered Pfandbriefe and traditional bearer bonds to jumbo. And the market has very strong systemic support from the finance industry in Germany.
Horst Bertram, BayernLB : The declaration by the German government that the Pfandbrief is a safe product and that the government will do everything necessary to protect it to ensure it remains a safe product had a tremendous impact on the market. From an issuer point of view, for a couple of days we had no issuance in the Pfandbriefe, but a declaration was all we needed to get a private placement in the domestic market. So this declaration was clearly helpful. I don't know if there was a need for a legal binding version, but a clear declaration was extremely important.
IFR: By declaration you mean from the German government?
Hagen : Yes, the commitment expressed in the financial stability law, passed a couple of weeks ago, did not include Pfandbriefe, but the government made a very strong verbal commitment to the Pfandbrief market. It said it was not necessary to include the Pfandbrief market in the rescue package because it is already safe – there has not been a default in over 200 years, after all. If it becomes necessary to implement legal measures then the German government will do so.
IFR: So the government will intervene only if necessary?
Hagen : Yes.
IFR: Have investors bought that argument?
Steffen Dahmer, JP Morgan : We have definitely seen a couple of days when the market was really dislocated. It was a brilliant statement, one of the most effective I have seen in the last few weeks of this financial crisis: it cost nothing and meant so much. Look at Hypo Real Estate and Depfa Germany, and where their bonds were trading compared to where Depfa ACS were trading, that shows the impact the statement made.
IFR: One could argue that an outright guarantee has done Irish covered bonds no favours.
Pimper : It seems so. Global spreads didn't change after the Irish guarantee. I agree that there is no need for a government guarantee in Germany for Pfandbriefe. This product is as safe as possible.
IFR: What do we expect the effect of the government bail out schemes to be on the Pfandbriefe as an asset class?
Engelhard : Government guaranteed debt issuance clearly provides competition to covered bond funding for banks, as in other countries. There are clear break-even calculations taking place regarding the all- in costs for government funding versus
Volk : The guarantee scheme restricts issuers to three years, so as soon as the market shows some stability and investors are willing to invest in long maturities, or perhaps in placement format, maybe issuers will not be able to use government guaranteed paper for duration.
Engelhard : I disagree to some extent. At this point in time it is particularly difficult for any issuer, be it a covered bond issuer or even a supranational, agency or sovereign, to issue longer maturities in benchmarks. I would not place too much hope in a speedy revival there. When the markets stabilise that is when we will see longer-dated issuance, not at this point in time.
Laurent Viteau, EuroMTS : Perhaps Pfandbriefe will not compete with the government guarantee but will help issuers match their liabilities where they need to issue in longer-dated maturities in benchmark size.
Joerg Huber, LBBW : It really depends whether we are looking at mortgage Pfandbriefe or public Pfandbriefe. In public Pfandbriefe there is still a lot of over-collat- eralisation, and there is certainly room to issue if you pay the necessary price. On the other hand, new assets in the public cover pool are getting cheap as well. All the state guaranteed paper should be eligible and here you have paper coming in at around Libor plus 20bp. This is up to two years. We
Pfandbriefe, which is, in general, perhaps the next best solution. There is still some space left between where banks can raise money via a Pfandbrief issue and the all-in costs for using the government guarantee – which is maybe north of Libor plus 100bp.
IFR: So German issuers will have to accept a new price?
Engelhard : The market is open but in small amounts – around Libor plus 30bp, according to our observations. For a jumbo or benchmark deal issuers may need to make bigger price concessions but there is some space left between where that price is likely to be and the break even point versus a government guarantee.
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