The Pfandbrief Roundtable 2013


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Despite falling supply, Pfandbrief issuers are eyeing
opportunities on the asset and liability sides of their business.
In this roundtable, sponsored by the Association of German
Pfandbrief Banks (vdp), leading market participants discussed
these, as well as market and regulatory challenges.

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The Pfandbrief Roundtable 2013

  1. 1. 30 The Covered Bond Report Mar/Apr 2013THE vdp PFANDBRIEF RoundtableMar/Apr 2013 The Covered Bond Report 31Neil Day, The CBR: How has Pfandbriefsupply been developing this year?Sabrina Miehs, Helaba: If you look atoverall issuance, it has started slightly lesspositively than in 2012. In terms of bench-marks, Germany was actually better in thefirst quarter, when it represented one-fifth ofbenchmark issuance. I think this will holdsteady throughout the year. Because spreadsare so tight, I wouldn’t expect the movementtowards benchmark issuance to come down,so my expectation is that we will see Eu22bnof euro benchmark issuance of GermanPfandbriefe in 2013, which would be similarto or a little bit more than last year.Jens Tolckmitt, vdp: What we haveclearly seen in recent years is a strong con-solidation in public sector Pfandbriefe. Itwas already evident in 2012 and will occurthrough 2013 and beyond. This consolida-tion is not compensated for by a positivetrend in mortgage Pfandbriefe, so you havea net consolidation of the overall market.So looking beyond the first quarter of 2013we expect this trend to continue.At the end of last year we made an es-timate based on quotes from our mem-ber banks of an overall issuance volumeof Eu60bn, but if you look at recent yearsand at the different developments that havedriven issuance and opened or closed issu-ance windows, you have to be careful withthese kinds of estimates. So the low level ofissuance in the first quarter has to be con-sidered taking into account the fact that inrecent years we have seen issuance fluctu-ate strongly from one period to the other.I wouldn’t necessarily take the first quarteras an indicator for the rest of the year.Marco Bales, UniCredit: I would just addthat benchmark Pfandbrief supply is in linewith overall supply. Actually Pfandbriefeare holding up quite well with the new is-sues that we have seen so far. The total eurobenchmark covered bond market is downbasically 50% versus the first quarter of2012, and if you look at the global coveredbond market — i.e. including US dollars,etc — it is down even more. So there is defi-nitely also less supply. The largest decreasehas been in France, but we also haven’t seenany UK covered bonds so far, and onlyone Australian, whereas they issued someEu5bn in the first quarter of 2012. It seemsto be a general trend that banks might be inneed of less funding.Day: What funding needs do the issuershere today have for the year, and how didyou find the first quarter?Bodo Winkler, Berlin Hyp: We calculatethat we will need about Eu3bn of coveredfunding this year. More than one third hasalready been done during the first quarter.We issued a jumbo at the end of January, soEu1bn, and private placements of approxi-mately Eu250m so far.Of course, if you calculate what you willneed before the year starts you will alwayshave to take into account how new businessevolves during the course of the year, thedevelopment of the overall market, and towhat extent you extend loans.So from our point of view, the first quar-ter was more than OK. Concerning bench-marks, we always said we would do this onejumbo, which has been done, and we saidThe PfandbriefRoundtable2013Despite falling supply, Pfandbrief issuers are eyeingopportunities on the asset and liability sides of their business.In this roundtable, sponsored by the Association of GermanPfandbrief Banks (vdp), leading market participants discussedthese, as well as market and regulatory challenges.THE vdp PFANDBRIEF roundtableMarco Bales, Global Co-Head ofCapital Markets, UniCreditClaudia Bärdges-Koch, DeputyHead of Treasury, Münchener Hy-pothekenbank (MüHyp)Ralf Burmeister, SeniorPortfolio Manager for CoveredBonds, Deutsche Asset & WealthManagement (DeAWM)Götz Michl, Head of Funding,Deutsche Pfandbriefbank (pbb)Sabrina Miehs, Covered BondAnalyst, Landesbank Hessen-Thüringen (Helaba)Jens Tolckmitt, Chief Executive,Association of German PfandbriefBanks (vdp)Bodo Winkler, Head of InvestorRelations, Berlin-HannoverscheHypothekenbank (Berlin Hyp)Neil Day, Managing Editor, TheCovered Bond Reportthat depending on the development of theprivate placement market we might issueanother benchmark later this year, but ifso it will probably not be before the thirdquarter of the year.Götz Michl, pbb: I agree with Bodo. Pbbhad a very strong first quarter with regardto our funding activities, and we were quitehappy to come to the market with severaltransactions in benchmark format.Pbb’s overall funding need depends onnew business volumes and we see strongdemand on the lending markets. There-fore — if the market environment does notchange significantly — there may be evenmore benchmark transactions.We have seen some public sector bench-mark transactions. If this trend continues,we could tap the market with a public sec-tor bond in addition to our mortgage bondissues.But the key point these days is the over-all market sentiment in light of the sover-eign debt crisis. We will continue to seizethe opportunity to issue, when there is li-quidity in the market to issue, because thebig concern is market volatility. It’s veryhard to predict whether the market will bethere, whether new issues will be taken up.Of course we have a very strong productwith the Pfandbrief, but nevertheless wemonitor the markets closely and will use awindow of opportunity rather than wait fora better opportunity which may not comeDay: Claudia, you waited ahead of thebenchmark you issued yesterday. Howmuch of an issue was the kind of volatil-ity that Götz describes?Claudia Bärdges-Koch, MüHyp: Weinitially planned to issue yesterday’s bondexactly on the Monday when Cyprus wason the screen and all over the market. Wesaw the Bund future move 135bp, so thatwas definitely not the day to issue a newbenchmark. So yes, there can be volatility.When we looked at a deal at that time,long yields were at a different level and wewere looking at doing an 8.5 year to reach a1.5% coupon. That is now history, so whenwe came to the market this week we saidit makes no sense to do a broken maturity.The roundtable was held atpbb’s offices in Eschborn,Germany, on April 11
  2. 2. Flexibility is essential in volatile mar-kets. A continuous investor dialogue andtheir feedback enables an issuer to reactwell and do the right deal at the right time.Our funding needs on the covered sidewill be between Eu3bn and Eu4bn thisyear. We can issue more or less every quar-ter when we see demand. The focus will beon the mortgage business — the Eu1.5bnmaturing on Monday was a mortgagePfandbrief and this is our main businessfocus. By the end of the year a public sectorbenchmark is also possible.Day: There’s low supply. There’s volatility.How is this affecting spreads and whatare your expectations?Ralf Burmeister, DeAWM: From the per-spective of the German Pfandbrief, it’s arather easy equation, because there is sucha huge negative net supply. It’s the largestmarket in terms of redemptions, with someEu50bn becoming due this year – and stillsupply isn’t catching up. This is of coursehighly supportive of spreads.I’m quite pleased that the issuers havelearned the lesson, that they come to mar-ket when the market is there and prefundthemselves rather than waiting for thepossibility of issuing 2bp tighter. This alsohelps stabilise the market because if youhave issuers having already done 50%-60%of their funding by April, it makes it quitecomfortable for the overall market. There-fore in terms of supply dynamics, it is prob-ably one of the easiest markets.Day: Spreads have returned towards pre-crisis, Libor flat levels. Obviously that isa good thing, but does it make executionmore difficult? Berlin Hyp seemed to findthat an issue, for example.Winkler: It’s no secret that this was arather difficult deal, coming in the Liborminus area.Concerning the oft-cited “Libor flatbarrier”, you have to distinguish betweenthe benchmark market and private place-ments. Funnily enough, issuing at Liborminus levels is not an issue in the privateplacement market — BHH has issued pri-vate placements between two and 12 yearsso far this year and none of them was in theLibor plus area.An explanation for why the execution ofbenchmark deals gets more difficult in theLibor minus area seems even more difficultwhen I look at our latest order books: usu-ally a maximum of 20% are asset-swappers,with most investors buying the bonds out-right. Therefore it is a strange question whyLibor flat should be a barrier.In the end I think it is predominantlythe low yield environment which makesit difficult. Even if you manage to print acoupon of at least one per cent in a medi-um maturity we are still talking about lev-els that are much lower than the Germaninflation rate. But this general situationhas nothing to do with spreads 1bp or 2bphigher or lower, or minus or plus. It’s a dif-ferent question.I think this “Libor flat barrier”, if it isthere, is something more psychological thansomething that can be explained logically.Bales: Investors always look at what theyview as comparables, which asset they canbuy at a certain spread, and one of the maindrivers — probably it still holds true for allmarkets — is the underlying government.Even though there are certain countrieswhere covered bonds can now trade farthrough the sovereign, nonetheless theoverall level where the government is doeshave sort of a function on where also cov-ered bonds are priced. Last year we sawthree Pfandbriefe that were priced in Liborminus territory, on the shorter part of thecurve, and most of them came at a timewhen Bunds were trading more expensivedue to the volatility in the overall euro sys-tem. So, that’s one fact.What do you compare Pfandbriefeagainst? Most German Pfandbriefe tradepretty much on average flat to GermanLänder, some even trade through theLänder. The Münchener Hypo yesterdaycame at plus 3bp and today there was a tapof a Land Hamburg 2022 at plus 9bp. So it’sa question how far you can move away fromthat in a country where the government isstill Aaa/AAA/AAA, and not triple-B.So I think it has a lot to do with rela-tive value. But clearly, as Ralf mentioned,the overall dwindling supply clearly helps.The total amount of Pfandbriefe that werearound on 31 December was Eu525bn. Ithink we are going below Eu500bn now.That’s a trend that is beginning to ease,but there is lower supply and there is still apretty strong investor universe looking forthese assets — especially Germans, but notonly Germans, and including a high qualitycentral bank, public sector bid.Bärdges-Koch: We issued two of thosedouble-digit minus deals and it was defi-nitely as Marco said. With the two year, forexample, there had been no supply in thatarea — because no-one was issuing due tothe LTROs — and we were approached byinvestors who said, look, we aren’t lookingat it so much as a Pfandbrief, we are takingit for the pick-up against Bunds. That was acompletely different view and at that timethe coupon was not the deciding factor. Ihave to admit that we were completely sur-prised because we would have never everlooked at it, our product, in the same way.That’s something that you would only learnin a dialogue.We realised that the situation in thesecond half of 2012 was completely unu-sual. That is the reason why we could notcompletely give those funding levels to ourlending department. The market will de-termine the natural floor for the GermanPfandbrief. At some point investors say,it’s too expensive, why should we buy it?I’ll buy some government bonds or othercovered bonds that are coming to the mar-ket, but Pfandbriefe are not really tempt-ing. I think that’s something we really haveto be careful about, that it doesn’t end upas a domestic niche product, for example.THE vdp PFANDBRIEF roundtable32 The Covered Bond Report Mar/Apr 2013Claudia Bärdges-Koch:“The market will determine thenatural floor”
  3. 3. THE vdp PFANDBRIEF roundtableMar/Apr 2013 The Covered Bond Report 33And anyway, it’s still a good product: I don’tmind about plus 3bp – it’s the right levelthis time.Burmeister: I think there are a coupleof points to mention in this regard. Onething is that as an investor you are alwaysvery happy if you get a new issue premiumand if you are already issuing at minussomething, in order to have a decent per-formance the bond must go down into theminus double-digits.Secondly, what has changed in the in-vestor landscape in the last couple of yearsis that there is much fiercer competitionwhen it comes to cross-asset allocationand selection, also because of the volatilityand absolute yield levels. Marco mentionedthe Länder example, and then there areall the agencies like EFSF, ESM and so onand so forth, which offer a decent pick-upagainst German Pfandbriefe. It’s no longera pure German Pfandbrief play or lookingat where French paper is, where Germanpaper is, and then asking if the pick-up isenough. Your peer group has simply be-come larger. It’s not a phenomenon of thePfandbrief itself, I guess, it’s due to thewhole market. If you have a broad man-date, for example trying to replicate or be-ing benchmarked against euro aggregateindices, you have a lot of choice so youdon’t depend on a rather expensive seg-ment like the German Pfandbrief. There’s acertain danger in that.Plus, as you mentioned, in real terms ifyou are buying below the inflation rate, itmakes it tough to have a decent weightingon that position. Sometimes for liquiditypurposes, of course, you have demand forGerman Pfandbriefe, but we have to justifyourselves to our investors and if you go fora five year Pfandbrief, for example, and itgives you a yield of, say, 1% and inflationis 2%, it’s difficult to explain the rationalebehind it, to say, OK this is good for you.As a defensive move, maybe, but if you say,no, we don’t expect the landscape to changedramatically over the five year tenor, it re-ally makes it tough to justify that.Miehs: But are the low spreads not alsoleading to an appetite for longer maturi-ties, opening the possibility of tapping thispart of the curve? This week we saw a lotof longer maturities, like seven, eight or10 years. This wasn’t so evident in the firstquarter, but now we are starting to see asmall tendency towards longer maturities.This is probably partly because there is aneed on the investor side — for insurancecompanies, for example — but also becauseit is clearly good on the issuer side to havelong term financing and at the moment it isvery attractive.Burmeister: That is exactly what the cen-tral banks want us to do, to go out along thecurve. It’s as simple as that.Day: What are the attractions of foreigncurrency issuance? Claudia, you did adollar deal last year, for example.Bärdges-Koch: We have US dollar assetsand therefore have a natural need in thiscurrency. The same is true of Swiss francs,where we have covered bonds outstand-ing, and we are going to look at the sterlingmarket for this reason.For us it’s not currency arbitrage likewhat we have seen from the Nordics, forexample, where they just use it as an addi-tionalfundingsourcewhenissuingineurosand move it back into their local currency.We do have needs in those currencies andfor regulatory reasons it makes sense to is-sue in those currencies corresponding tothe assets in your cover pool.Michl: It’s the same here at pbb. We havenew business predominantly in euros butalso in sterling, and to a lesser extent inSwedish kronor. So we aim to get the cur-rency on the liability side where you havethe assets. Each cross-currency construc-tion inside the cover pool is difficult andalso expensive. Therefore to get fundingin the right currency is helpful. And there-fore we did a sterling transaction last year,£250m, and we are looking for sterling thisyear as well. We also did a Swedish kronatransaction, Skr600m a month ago.Day: In what way did your experience ofthe sterling market differ from your typi-cal euro experience?Michl: When you enter the market, youtypically have a lead order, then you build adeal around that.Especially in sterling it is importantto be a regular issuer. It is also importantto explain the German Pfandbrief in theAnglo-Saxon environment as investorsare more familiar with SPV constructionswhich work differently. Investors also needto get comfortable with your bank ratingbecause they see the linkage. The currentenvironment in the UK supports our case:Due to the Funding for Lending Schemethere is no sterling covered bond supply“It’s no longer apure GermanPfandbrief play”Jens Tolckmitt:“I wouldn’t necessarily take thefirst quarter as an indicator”
  4. 4. from domestic issuers.We can afford to pay a higher premium ifwe issue in sterling as this saves us the com-plexity of a swap. With CVA charges comingup and all the potentially difficult questionslinked to derivatives in cover pools you canpay more for the foreign currency than foreuros. And therefore it becomes a little bitmore attractive for foreign investors. Andthere is good reason for the issuer.Burmeister: We also like to see this fromissuers. First of all, that they diversify theirfunding. Secondly, that they have naturalmatching and get around the obstacle ofderivatives in the cover pool.The next thing is, of course, that if issu-ers diversify out of euros in terms of theiroverall funding, it eases supply pressure alittle. We mentioned before there is no realpressure on supply in terms of Germanpaper, but if they diversify in other curren-cies, that’s fine and it’s also supportive ofeuro spreads. So I think it’s good to exploitthose possibilities and to place Pfandbriefenot only in continental Europe, but abroadand with a new investor base. Spreadingthe product can only give more stability inthese turbulent times.Michl: You really need to invest time inapproaching these markets. And the in-termediary needs to understand that thereis probably more business to win if this issomething that the issuer needs. The inter-mediary can add completely new value tothe issuer. As you can imagine, many of theinvestment banks are looking for the easyeuro benchmark transaction because thatis the standardised product. But what an is-suer really needs is foreign currencies, newinvestors, a little bit of a different set-upand not the standardised product.Bärdges-Koch: I fully agree with the ex-tension of the investor relations work youhave to do.On my first UK visit the second investorI saw said they were missing the page fromour presentation showing the SPV struc-ture… I just stared at him and then realised!There is no SPV — it’s all on balance sheet.That way I really understood the completelydifferent perspectives there are because no-one would ask you that in Germany.Regarding new investors you have towork out what is different or new to them,and get them somehow to understand yourbusiness and the product.Miehs: Obviously you have to educate in-vestors in new countries, but in those wherethe German Pfandbrief is already known, Iimagine issuance is probably easier becauseof the high quality assets. So if you take theUS, for example, there you have an investorbase that has already invested in GermanPfandbriefe and you have convinced themof the quality previously, and they are look-ing for high quality assets.Day: On the asset side, how are propertyprices developing?Tolckmitt: The overall development, inboth the commercial and residential sec-tors, is very stable in Germany, with someexceptions in some of the metropolitan ar-eas, namely Berlin, Hamburg and Munich.Where you can say there are substantialprice increases is specifically in the residen-tial real estate and more specifically in thecondominium sector. The question is: isthat fundamentally justified? We think that,yes, it is still fundamentally justified. So it isnot what we would call a bubble but rathera development that, especially in the case ofBerlin, you can show relates to the fact thatBerlin was a latecomer to the property mar-ket. For a long time after reunification it wasan area with very low prices. That is chang-ing to a certain extent now, but Berlin is farfrom having caught up with other metropol-itan areas in Germany or other metropolitanareas in Europe. So this price developmentis still justified and we retain the overallimpression that there is a very, very stabledevelopment in the property market, in allsegments. That is very important.If prices are rising does that mean any-thing for the Pfandbrief? The most im-portant thing is that we have the so-calledMortgage Lending Value, which is particu-lar to Germany. More and more peoplealso outside Germany now understand thisvaluation method and it is, interestingly,catching the attention of other countrieswhere developments in property priceshave been more substantial. They are look-ing for reasons why this has not been thecase in Germany, and one of the reasons isthe Mortgage Lending Value.As a rule of thumb you can say that theMortgage Lending Value is around 15% be-low the market value of a property. And ifyou look at different points in the propertymarket cycle the more the market value of aproperty increases, the larger is the gap be-tween the Mortgage Lending Value and themarket value. So as the Mortgage LendingValue is the basis for including collateralin cover pools and lending up to 60% of aTHE vdp PFANDBRIEF roundtable34 The Covered Bond Report Mar/Apr 2013Bodo Winkler:“It’s an additional buffer for theinvestor”“The intermediarycan add completelynew value”
  5. 5. THE vdp PFANDBRIEF roundtableMar/Apr 2013 The Covered Bond Report 35property’s value and refinancing that loanvia Pfandbriefe, we don’t see any impactfrom rising prices. This is actually one ofthe safety features of the Pfandbrief.It is also very important to mention thatloan to values granted by banks have de-creased substantially since 2008 and haveremained at a much lower level than beforethe crisis, and this also helps underline theconstant safety of the product.Winkler: This positive development ofGerman real estate prices comes alongsideconsistent demand for German properties,which in return gives credit institutions thepower to lend only to lower LTV levels. Wehave reduced the LTV levels that we arefinancing substantially over the last years,too; at the same time we were able to in-crease our margins.Regarding the Mortgage Lending Value,under the German Pfandbrief Act we haveto recalculate it at regular intervals. At Ber-lin Hyp we re-evaluate the properties wefinance at least every second year. If themarket goes down we have to decrease theMLV. If the market goes up, the MortgageLending Value stays exactly where it is.What this does is add additional OC to thecover pool which is not taken into accountby either investors or the rating agencies.It’s an additional buffer for the investor inthe end. Jens spoke of this rule of thumb— we compared market values and MLVslast year for our cover pool, and it’s quiteclose to that number that you stated. In ourcase it was a 17% difference over the wholecover pool — 17% additional buffer of se-curity for investors in the end.Burmeister: It is absolutely a part of ourjob to look into something like this. It isrelated to the seasoning of the loans, obvi-ously, and also the area of business. Onething you have to state about the GermanPfandbrief — and which makes it differ-ent to its brothers and sisters throughoutEurope — is that you have a large chunkof commercial business in it, while almostall other mortgage backed European cov-ered bonds are purely or 80%-90% resi-dential. In Germany you have issuers thatare purely focused on German residentialmortgages, and then you have issuers whoare almost exclusively commercial lendersacross Europe, and that’s a broad variety.It is exactly part of the investor job to lookat the specific risk of an issuer’s businessmodel plus the risk being put in the coverpool. I therefore think it’s not really fair tomake statements about Germany propertyprices going up and that being good for thePfandbrief — rather, it should come downto a case by case analysis, saying, OK, what’syour share in country x, y or z, what’s hap-pening to property prices there, how muchbuffer do you have, etc.Day: Commerzbank launched its SMEbacked structured covered bond in Feb-ruary. What do you make of this develop-ment?Michl: We have looked at the concept ofstructured covered bonds — like manyothers did. However, we came to the con-clusion that it does not fit our businessmodel. We are a specialised mortgage lend-er, lending against commercial real estate atlow LTVs. Therefore, most of the loans fitinto the Pfandbrief. So we have no need forsuch a structured covered bond and there isno portfolio to produce one.From my point of view, the deal hasbeen over-rated. Of course it’s good to seethat a structured covered bond can be done— but it has to fit the portfolio.Winkler: But it’s short dated corporateloans and a medium term covered bond. Iam not as relaxed towards this product asyou are, to be honest. This is not because Ido not like the product, as such. Of courseMittelstand is important to Germany andfinding new ways to refinance your loans tothe Mittelstand is valuable, but why call it acovered bond? What I don’t like is the labelof a covered bond in this. If any investorwould lose money on this investment, hemight say: Oh! This is a covered bond andit came from Germany — and then thereis a very obvious linkage to the Pfandbrief.Michl: It is not a Pfandbrief and thereforeit’s fine.Winkler: But I think what most coveredbonds have in common in Europe oraround the world is that you put certainspecified high quality assets into a coverpool and you do term funding against this.Burmeister: And you have long term as-sets, that is the point. There is not a highturnover in the pool.Bärdges-Koch: What I think is evenmore important is that you have a legisla-tion behind it. And in the Commerzbankdeal it is a bilateral contract. I have to admitI was surprised to see that the ECB is nowputting the deal into the same haircut classas covered bonds.Burmeister: Absolutely. Another thing Iwould like to add is: does the German Mit-telstand have a funding problem? Or is itmore the SME business in other countries?That’s one thing.Marco Bales:“Funding for SMEs is a hugetopic”
  6. 6. The other thing is, naming and label-ling it a covered bond. The point is: you canbring it to the market – I don’t mind — butwhere will it end up in the indices? Bar-clays has included it with covered bonds,but iBoxx has lumped it in a segment witha Czech energy supplier. Will I one daybecome a forced investor because its sharegets so large, and do our clients really wantto invest in these asset classes? Coveredbonds is mortgages and public sector assets— apologies to the Flugzeugpfandbriefeand shipping Pfandbriefe…Tolckmitt: They are totally different, theyare long term assets and they have a safetystructure.Burmeister: And shipping Pfandbriefe sofar haven’t made it into the indices…Michl: But is the name really a problem? Iwould expect that whoever selects the assetto go into an index will take a closer lookat the transactions. Otherwise one could doan unsecured transaction and simply call itcovered…Burmeister: You are absolutely right, butthen in the next step it comes down to reg-ulation. Under current thinking the idea isthat a covered bond should be exempt fromany kind of bail-in. And if a deal is basi-cally a senior unsecured note with somekind of collateral behind it, how should itbe treated in case of resolution? Should itbe exempted? So there is another dilemma.Tolckmitt: I would agree that the discus-sion of whether or not a covered bond canbe called a covered bond in English is a lit-tle esoteric. If the traditional covered bondneeds to be differentiated, then please canindustry differentiate it by naming it differ-ently. ‘Labelled covered bond’ could be onesuch example if the ECBC label developsinto a market standard. A name that can-not be attained by a covered bond backedby SME loans.Having looked at developments overthe last one and a half years, my view is thatwe have come a long way in differentiatingthe structured covered bond from what inGermany we would call a Pfandbrief. In thebeginning, people went around and saidmaybe there could be an SME Pfandbriefand we said, no, there will never be an SMEPfandbrief. And I think this view has takenhold in the market.It is important to make very clear thedistinction between the traditional coveredbond and this kind of structured coveredbond because a big challenge in the futurewill be that in regulatory discussions thoseputting any type of asset in a structuredcovered bond will try to gain preferentialregulatory treatment alongside traditionalcovered bonds. So there is a danger of ablurring of frontiers between the tradition-al product and these new products.Secondly, it is not the right way to be-have towards investors because under allregulations today these structured prod-ucts are not treated preferentially, and youshould not give the impression that theyare or will be.And, thirdly, we have achieved a lot forthe traditional covered bond in the regula-tions that are coming out in all areas — be itfund regulation, be it insurance regulation,banking regulation, bail-in regulation —everywhere we have a justified preferentialtreatment for the traditional covered bond— but this preferential treatment is undervery, very close scrutiny. And my biggestconcern in the medium term is that if thereis any impression that the universe of pref-erentially treated covered bonds is growingand is getting more complicated then weare really at risk of losing this preferentialtreatment for the traditional asset class. Wedon’t want to end up in this situation, andthat is why we have to make very clear asan industry — not only the German indus-try — that we see a difference between thestructured product and the traditional cov-ered bond/Pfandbrief.Bales: I tend to very much agree with you,Jens, if you look at the pure Pfandbrief andsay: this is a Pfandbrief, this is the legisla-tion, this is what the Pfandbrief is about.Regarding the name, structured cov-ered bond, well, it’s an English description:covered bond. You have a senior bond thatyou cover by some assets. What else do youwant to call it? The fact is, it is an SME cov-ered bond because it is covered by assetsthat are SME loans.We were on that deal and every inves-tor knew exactly that he was not buying aPfandbrief, every investor knew what wasin there. There was also an intensive road-show behind it and everyone was madeaware of what was behind it, the assets, etc,and Commerzbank did a very good job ofexplaining that.Also, if you look at the spread, the bondcame at plus 47bp. I think a five year Pfand-brief of Commerzbank at that time wouldhave come substantially tighter, probablyaround the plus 5bp to 10bp area. A seniorunsecured obviously would have probablybeen roughly 40bp-50bp wider. So it waspriced somewhere in between.I think you have to go one step beyondthat and look at the discussion that is cur-rently going on among regulators, politi-cians but also the ECB. Funding for SMEsis a huge topic, and you currently have aTHE vdp PFANDBRIEF roundtable36 The Covered Bond Report Mar/Apr 2013Götz Michl:“You really need to invest timein approaching these markets”Ralf Burmeister:“Will I one day become a forcedinvestor?”
  7. 7. THE vdp PFANDBRIEF roundtableMar/Apr 2013 The Covered Bond Report 37market environment where top multi-national corporates can fund themselvesvery cheaply, even longer term in the bondmarkets, and for short term liquidity theyget very cheap funding levels via revolv-ing credit facilities from the banks. Butas soon as you start to leave the triple-Bminus sector, it gets more and more chal-lenging. For German corporates, you stillhave the Schuldschein business, especiallyfor the ones that have a decent size andgood name recognition. But if you go onestep beyond that, it gets challenging, andespecially if you leave Germany and go toother countries, then it gets really tough.And we have to accept that the new regu-latory environment for banks has madeit a lot more expensive for banks whichare in this business to lend at competitive“cheaper” levels.So it is fair enough — especially if youalso look at the bail-in discussion withregard to senior debt — to ask: is there afunding opportunity that banks couldsomehow use to have access to cheaperfunding to pass on to SMEs? Because we allknow that SMEs in Europe are very, veryimportant. From a political and economicview it is just as important as giving cheapfunding to home owners.Winkler: But, Marco, nobody would denythis. For me it’s just a question of marketingthis special tool. Has it got to be named acovered bond? In my personal view, a cov-ered bond is a high quality…Bales: The Turkish legislation allows youto issue SME covered bonds.Winkler: Yes, and you could discusswhether it should be like that or not…As traditional mortgage lenders, we putthe best assets we have into our cover pool,and then we issue high quality debentures:Pfandbriefe. In the case of the SME coveredbond, the assets were not investment graderated SMEs. If you look at the Moody’sreport, the pool does not contain a singleloan which is investment grade. They are allBa1 and lower. This leads to another ques-tion: If the issuer is rated A3 and all assetsin the pool non-investment grade, howcan this pool add quality to the unsecuredclaim against the bank?Tolckmitt: There is one thing that wehave to be extremely careful about. I havenothing against duplicating the idea of se-cured funding to make SME loan financ-ing cheaper. But is it OK that this kind ofproduct be moved close to the traditionalcovered bond in order to profit from thebrand? There I would really be hesitant,because you have the potential to dilute anasset class that has been extremely strongduring a very difficult market. And this di-lution, if it happened, would be hard to fixafterwards.Day: Bodo, would the ECBC Label notperhaps be a useful way to delineate whatis a covered bond in your eyes? I under-stand that you have not signed up to it.Winkler: After what we have just heardabout differentiating between SME backedstructured covered bonds and traditionalcovered bonds, you may be right. So farmost German issuers didn’t sign up for thelabel — only two have the label for theirproducts. The rationale behind this is thatthe requirements of the Pfandbrief Act aremuch stronger than what is asked for to ob-tain the ECBC Label.For instance, increased cover pooltransparency is one of the very positiveoutcomes of the labelling initiative so far,as it wasn’t very far developed in somecovered bond jurisdictions before the la-bel started. But in Germany no increasewas necessary as we already have legallydefined transparency standards in thePfandbrief Act which are subject to ongo-ing advancement. Another example is thespecial public supervision that the Pfand-brief Act requires while the label only asksfor public supervision.Inmyview,whatwouldturnGermanis-suers quite quickly towards the label wouldbe restricting regulatory privileges for cov-ered bonds to labelled covered bonds only.Michl: I think it may be a good idea to la-bel European covered bonds. Still, investorsneed to analyse what they are buying.Tolckmitt: I think this branding issuearound the Pfandbrief is a very importantreason why German issuers have been sohesitant about acquiring a label.I also don’t see any preferential treat-ment of labelled covered bonds at the verybeginning, simply because it’s a privateindustry initiative and it’s difficult to putsomething like that into law. And to myunderstanding all the regulators who havebeen asked about this have clearly indicatedthat they don’t see an immediate measur-able benefit with regard to the label either.One thing I deem to be really important,as I said before, is that going forward wewill be regularly benchmarked on whethergranting preferential treatment to coveredbonds is still justified, and for which cov-ered bonds. We will also face a consultationand an enquiry from the European Com-mission into what is a covered bond. Andthen we will face a discussion on whetherwe should harmonise covered bonds acrossEurope, and to what extent we should har-monise them and what should be the con-tent of a harmonised covered bond.In all these cases the industry issuingtraditional covered bonds is well advisedto ring-fence its own product, and the labelcan help in this ring-fencing. And althoughthis does not have a measurable, tangiblebenefit now, my feeling is that it can turninto a tangible benefit quite quickly, simplybecause at some point we can say, look, thisis the traditional covered bond that in the1980s you granted preferential treatment toon a European level, and this is the ring-fenced one, and we ask you to continuegranting preferential treatment — whichmight be more difficult if the universe getsmore diverse than it is today. nSabrina Miehs:“Issuance is probably easier be-cause of the high quality assets”