6 | ifr special report | December 2008 PFANDBRIEFE ROUNDTABLE “
At the international level there are a lot of calls for more regulation, more supervision, more transparency, less complexity, higher credibility – even without taking into account the rating agencies. The Pfandbrief has all of this.
unsecured levels, which are extremely wide, and state guaranteed levels. But with the systemic risk moving from banks to sovereigns, perhaps issuers are unwilling to pay unsecured levels.
IFR: So what would be the effect of a steepening of the curve then, in terms of maturity?
Dahmer : I believe this is a positive trend. It now makes sense for a lot of investors to look after the longer end of the curve. Two or three months ago there was no need, with this higher Libor fixings – better to stay in three or six month durations while there was so much uncertainty over whether counterparties would be able to pay back.
I am also more confident on the balance sheet side. All these traditional agency names like KFW will try to avoid clashing with these new guaranteed schemes. If in the middle of 2009 we see rationality return to the market we may see investors say, "okay, I can buy a guarantee Bank X bond at Libor, or I can buy a covered bond of exactly the same name and maturity at Libor plus 20bp. I prefer the Libor plus 20bp because it's more juicy, obviously, but indirectly I feel just as safe as I would with the pure guarantee." For an issuer it would make sense to issue in that way because then you avoid the initial guarantee costs. Maybe that is too optimistic for the middle of 2009, but I hope this kind of rationale comes back into the market.
Hagen : Right now we are facing a psycho- logical problem. We can talk a lot about Pfandbriefe, we can talk about a lot of technical issues, but in the end it's about confidence. At the international level there are a lot of calls for more regulation, more supervision, more transparency, less complexity, higher credibility – even without taking into account the rating agencies. The Pfandbrief has all of this: it is highly regulated; it has a lot of supervision – more than the usual level of supervision for banks; it is a very transparent and stan-
dardised product; it's easy for investors to get their own view on the quality of the Pfandbrief, because of the law and because of the transparency required by the law. The Pfandbrief has everything. Once confidence returns, the Pfandbrief should be the first thing that picks up again.
Viteau : If you look at some of the pillars of the Pfandbrief, you have safety, trans- parency and liquidity. Investors know the product is still safe but there is less liquidity – though the same is true of government and agencies bonds. The Pfandbrief is certainly less transparent, in terms of pricing source, getting it marked to market and getting a Libor price.
The business models of many
Pfandbrief banks have been called into question. Many investors still need to digest what happened with Hypo Real Estate and Depfa in particular, but also some of the other Pfandbrief banks.
Volk : It's not a matter of credit quality or trust in the Pfandbrief, it's more a matter of liquidity. If you buy a 10-year Pfandbrief at the moment you will struggle to find liquidity if you want to change your position in a few weeks. You have to accept a discount because all banks are in a deleveraging mode. This is maybe one of the reasons why the longer dated maturities are suffering more than shorter dated.
Engelhard : It's true that the Pfandbrief framework is one of the best established
and well regulated financial marketplaces. It fulfils all the criteria. However, the business models of many Pfandbrief banks have been called into question. Many investors still need to digest what happened with Hypo Real Estate and Depfa in particular, but also some of the other Pfandbrief banks. This will take time. The flip side of this is quite good news: we get deleveraging within the Pfandbrief system, back to a more healthy situation. In the end that is good news for the Pfandbrief. On another point, I am tired of hearing the jumbo Pfandbrief market has liquidity problems. This is a very bad argument. We are in a situation where the backbone of capital markets – your Euribor and Libor fixings in the money market – is underlying all swap contracts in the fixed income contracts. Nobody knows where this underlying will be tomorrow. So we have tons of derivatives in fixed income markets where nobody knows where the underlyings will be later today or in a week's time. Unless these problems are resolved, there is no way things can get back to normal in market making or in general for Pfandbriefe. This is not an issue that is confined to the Pfandbrief jumbo market.
I understand the history of this discussion, but I don't think it's appropriate to single out covered bond markets or jumbo Pfandbrief markets as having a particular problem with this. It is unfair.
IFR: So it is a wider problem?
Engelhard : It is a wider problem in capital markets. Unless the other areas are resolved and we get back to normal terms and conditions then the pain will be felt in all Triple A benchmarks.
Pimper : And it is all part of the same story: it is due to the financial turmoil which we are facing. The Pfandbrief is well prepared to work again once financial markets as a whole work again. There is no repo market right now for jumbo issues. Nobody knows whether Euribor is the real price. As an investor, I'm very happy with my
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