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4 | ifr special report | December 2008 PFANDBRIEFE ROUNDTABLE

will see other paper which is high quality and eligible coming in at double digit spreads, but it will be still more expensive for a borrower to issue than to buy these kind of assets. Nowadays nobody really wants to fund short term, because it is so expensive. Are there public sector borrowers out there who have over collat- eralisation who can issue?

As for the mortgage market, we need

investor confidence to return. The spectrum of German borrowers in the mortgage Pfandbrief area is huge, and the cover pools are so different that issuers really need to disclose information to investors regarding the security and safety in the cover pool.

Hagen : How long can investors continue to invest in these short term bonds or other short term credits? There must be pressure, especially for the usual Pfandbrief investors, to invest in longer maturities. They have to match their assets and liabilities. There should be a chance next year for Pfandbrief issuers to issue longer term Pfandbriefe – longer than three-years maturities.

Huber : We certainly have to see the first issuance under the guarantee mechanism, so investors can see that it works. In theory, following the announcement and what has been written into the law about Pfandbriefe, everybody should feel very secure. Even if nothing works, which hopefully won't happen, the guarantee mechanism would be prolonged beyond 2009.

A lot of investors have long term

investment needs. At the moment, they still get quite a high yield when they stay with their money at the short end but that will certainly change over the next couple of months. Pension funds, insurance companies and other investors will need to go in the long term area. If they are looking for jumbo transactions there will be less certainty. A lot of them would certainly like to get into registered issuance.

I think there is a lot of room for longer- dated issuance from the second quarter of next year.

Engelhard : I still have doubts, unfortunate- ly. There are ample opportunities for investors to invest in cheap, high quality paper. Longer dated bonds are trading at

Euribor plus 15bp to 20bp. This reflects the illiquidity in the market. You may also argue there are a lot of redemptions taking place, particularly in the Pfandbrief market, with a lot of money flowing to investors. But this argument is flawed: overall we see a deleveraging process, with many banks paying credit back which has funded their Pfandbrief holdings in the past.

Recent data from Reuters indicate that, in September alone, we saw net outflows of €22bn from bond funds in Europe. In 2008 overall it is a €100bn outflow. These are real money investors.

More importantly, many real money ”

investors are experiencing net outflows of money. Recent data from Reuters indicate that, in September alone, we saw net outflows of €22bn from bond funds in Europe. In 2008 overall it is a €100bn outflow. These are real money investors. In the money markets, September saw net outflows of around €66bn. Central banks, a very important investor group, are primarily interested in protecting the stakes of their home currency and their home economies. They need proceeds and it seems unlikely that they will use redeeming Pfandbriefe to invest in Pfandbriefe to any large extent, particular- ly longer dated paper. So for 2009 I think I am less optimistic than some others here.

Huber : Where do you think the money is going?

Engelhard : Dresdner bank is offering 12 month money for 5.25% for retail investors. That is big competition. In terms of funding from an issuer’s point of view, short term is the future.

But ECB just yesterday made syndicated loans eligible for ECB repo funding. That is a very efficient form of funding that also competes with Pfandbrief funding. Economically it isn’t easy, every bank wants to turn out the funding base, but in terms of immediate costs of funding, it's so efficient to use many other assets which are on the balance sheet of banks and which are not eligible for Pfandbrief cover.

Pimper : I think we can expect a lot of government guaranteed issuance in the next couple of months. I doubt it makes sense for Pfandbrief issuers to compete directly with that. It is better to keep the powder dry and try to go to longer maturities at the end. Right now it seems like agencies will suffer most – they are the ones who tend to compete with government guarantees. Pfandbriefe haven’t suffered much so far, though we haven't seen any German government guaranteed issuance so far either.

Bertram : If issuers use the government guarantee scheme they expect to use it for benchmark transactions, or getting a guarantee for large deposits. It gives room on the private placement side for Pfandbrief issuance.

Everyone is trying to issue in longer term maturities, but I agree with Fritz that in the first half of 2009 things will be slow. But a lot will change over next year. Confidence will return to the market and some investors have to turn to longer maturities – if there is enough money left. Germany may get its own version of the Basel II insolvency regime. Insurance companies have to go much longer in their duration to match their liabilities. So the trend is relatively positive but I'm not optimistic about the first six months of the year. Overall the competition is coming from so many products, it is a huge task for issuers to get the business done.

Volk : We still see this huge deleveraging process in the financial industry, which is likely to continue. Since 1998 bank balance sheets grew strongly in relation to GDP and this brings us to a strong steepening. We have already seen this and we expect a lot more to come. This is a burden for long dated paper. We saw some long-dated corporate issuance. Covered bonds in general – and Pfandbrief issuers specifical- ly – are a little bit stuck between

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