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THE PFANDBRIEF ROUNDTABLE 2012




                The
          Pfandbrief
         Roundtable
              2012
      German covered bond issuers have been shielded from
  the worst of the sovereign debt crisis, but nevertheless share
    the several challenges faced by the broader asset class. In
     this roundtable sponsored by the Association of German
Pfandbrief Banks (vdp), leading market participants gathered
      in Frankfurt in mid-January to discuss how the industry is
   tackling issues such as transparency and liquidity, and how
 they see the Pfandbrief faring in the face of developments in
                              collateral quality and regulation.

Neil Day, The Covered Bond Re-                be higher if market conditions in general       Day: What can we expect from Helaba?
port: What are expectations for Pfand-        improve over the year.                          Martin Gipp, Helaba: We have been
brief issuance this year?                                                                     active in the public Pfandbrief market
Jens Tolckmitt, vdp: The results of our       Day: Aareal issued in the second week           since 2010 with benchmark issues. Before
annual survey of vdp members showed           of January. Tammo, were you expecting           that we more or less focused on the private
that they plan to issue around Eu74bn of      to come to the market as early as that?         placement market.
Pfandbriefe. Most of this, about Eu43bn,      Tammo Diemer, Aareal: It’s the first               Our funding needs are usually in the
will likely be mortgage Pfandbriefe, which    time Aareal has actually opened the Pfand-      area of Eu10bn-Eu13bn. Last year we is-
is the continuation of a trend that we have   brief market. Our plans were to come pretty     sued about Eu12bn overall and the fore-
seen for the last few years, with mortgage    early in the year and it turned out to be the   cast for this year is around Eu13bn, and
Pfandbriefe being the dominant part of        right decision to come with a quality prod-     of that we expect to do about Eu7bn in
overall Pfandbrief issuance. Eu29bn have      uct with a medium term maturity, as we          Pfandbrief issuance. We will be active on
been announced as public Pfandbriefe          had a very strong order book. We priced a       both sides, mortgage Pfandbriefe as well
and Eu2bn as ship Pfandbriefe.                Eu500m transaction and had Eu900m of            as public sector Pfandbriefe. As we have
    That Eu74bn is less than last year,       honest orders, with a granular book of more     pretty large cover pools and collateral
when we expected Eu90bn. But due to           than 80 different accounts. We had a strong     available, this amount of issuance should
the extremely difficult market conditions,    demand from Germany and central banks.          be feasible.
we ended up with only Eu70bn in 2011.             We will have a pretty normal year regard-      In what form that will be done depends
Based on that and the still adverse mar-      ing Pfandbrief issuance, meaning Eu1.5bn-       very much on market conditions. Markets
ket situation in the government sector this   Eu2bn of mortgage Pfandbriefe, and we will      have been very volatile. We are always a very
higher estimate is quite a positive signal    be visible with two or three Eu500m trans-      price conscious house, so we are choosing
for the Pfandbrief market and it may even     actions, including the one we just issued.      the economically most sensible way for us.


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                                                      We have maturing Jumbo Pfandbriefe
                                                                                                   Participants:
                                                   of roughly Eu42bn this year and I would
                                                   expect, based on the numbers that have
                                                   been cited, perhaps Eu20bn in jumbos to
                                                   be a sensible estimate.
                                                      One more thing: you have mentioned
                                                                                                                   Ralf Burmeister,
                                                   mortgage, public and ship Pfandbrief —
                                                                                                                   senior portfolio
                                                   perhaps we will next see aircraft Pfand-                        manager, DB
                                                   briefe. I’m not sure if that will be a bench-                   Advisors
                                                   mark, but we will have a greater diversity
                                                   of products.

                                                   Ralf Burmeister, DB Advisors: It’s a
                                                                                                                   Robin
                                                   little bit of a pain from the investor side                     Buschmann,
                                                   when issuers are price sensitive. It is abso-                   senior portfolio
                                                   lutely fair, but when it comes to maturity,                     manager,
                                                                                                                   DB Advisors
                                                   we would love to buy longer dated paper,
                                                   10-15 years, but there is not too much is-
                                                   suance, especially in benchmarks: you can
                                                   use private placements. The private place-
                                                   ments are obviously targeted at a certain
                                                   investor base — which is fine, it gives you
                                                                                                                   Tammo Diemer,
                                                   a stable funding base and we love stable                        head of treasury,
                                                   issuers, no doubt about that — but we                           Aareal Bank
                                                   tend to have some difficulties, especially at
                                                   the long end of the curve, in finding good
                                                   German quality.
                                                        So when you talk about Eu75bn or so,
                                                   it sounds impressive, but breaking it down
                                                   to new issuance in jumbos or benchmarks,                        Martin Gipp,
                                                                                                                   head of funding,
                                                   it’s considerably less.
                                                                                                                   Helaba

                                                   Tolckmitt: It is. I would agree with Jörg’s
But for a targeted amount of Eu7bn this            estimate that Jumbo issuance will be
year, it’s fair to assume that we will be in the   around Eu20bn — although that is not
benchmark segment this year again at least         based on our survey. It really is a difficult
                                                                                                                   Jörg Homey,
once or twice, maybe even three times de-          number to predict. It depends a lot on the
                                                                                                                   head of covered
pending on market conditions.                      overall market conditions in the capital                        bond research,
                                                   markets. If they are good, there will be a                      DZ Bank
Jörg Homey, DZ Bank: Forecasts are                 larger number of Jumbos. If it is difficult,
particularly difficult this year for several       it’s maybe less.
reasons. One is that banks are deleverag-               If you look at last year, for example,
ing, which is obviously impacting their re-        by mid-year we had almost reached our
                                                                                                                   Jens Tolckmitt,
financing needs. Then, secondly, universal         estimate of Eu22bn and with conditions                          chief executive,
banks in particular can refinance them-            so difficult in the second half of 2011 we                      Association of
selves via deposits. And ECB-supplied sup-         ended up with Eu25bn.                                           German Pfand-
                                                                                                                   brief Banks (vdp)
port via the three year refinancing tender
is available if banks need liquidity and it is,    Day: What are expectations for the per-
let’s say, not economically feasible to refi-      formance of Pfandbriefe?
nance via the markets due to high spreads.         Robin Buschmann, DB Advisors: We
So for those reasons it’s very difficult to        always look at risk-return profiles, for any
predict a concrete number, so it could be          bond, and in regard to Pfandbriefe, you                         Neil Day,
                                                                                                                   managing editor,
anything between, if you are looking at            definitely have a lower risk profile, but you                   The Covered
benchmarks, Eu100bn-Eu200bn this year              also get a much lower return. The market                        Bond Report
for covered bonds overall.                         currently focuses on the risk component


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THE PFANDBRIEF ROUNDTABLE 2012




                                                                                                  respect support from the ECB could be
                                                                                                  extremely helpful.

                                                                                                  Tolckmitt: I would fully agree with this no-
                                                                                                  tion that it is a very important tool for the
                                                                                                  overall covered bond market. I would also
                                                                                                  agree with the fact that there are other coun-
                                                                                                  tries and other covered bond jurisdictions
                                                                                                  that might need it more than the Pfandbrief,
                                                                                                  much more than the Pfandbrief.
                                                                                                      But I think if you look at the aims that
                                                                                                  the ECB announced for the first purchase
                                                                                                  programme, they were not only to get the
                                                                                                  covered bond market going again, but to
       Tolckmitt: “Higher estimate is quite a positive signal                                     use the covered bond market as an initial
                    for the Pfandbrief market”                                                    market for getting the overall funding
                                                                                                  markets going again, and in the first round
rather than the return component. From          question is whether the Pfandbrief in             it worked quite well.
this perspective — and from our clients’        particular is in need of such additional              You can see certain limited spread re-
perspective, too, as they are quite risk        support. Back in early 2009, right before         actions to the second covered bond pur-
averse at the moment — Pfandbriefe are          the first programme, we had triple-digit          chase programme in the covered bond
attractive investments. Compared with           spreads for Pfandbriefe, but even then            market, too. It has not spread, as far as I
the overall covered bond market Pfand-          banks could issue. It is not the case for         see it, to other markets, but I think there is
briefe don’t look appealing just looking        some peripheral countries right now even          one very important difference that makes
at the return figures. If you consider both     if the ECB can take a part of their issue.        it more difficult to make this programme
components, risk and return figure, they            So, yes, it’s nice to have and of course      as successful as the first one: it’s a totally
are definitely one investment that you          it is their mandate to ensure financial           different macroeconomic environment.
have to have in your portfolio.                 stability, but from a pure, let’s say, micro
                                                perspective, they are crowding out us lit-        Homey: I totally agree. The covered bond
Burmeister: The other thing is tradabil-        tle covered bond investors, being a forced        purchase programme most certainly helps
ity. Not necessarily liquidity, but we can be   buyer with almost Eu3.5bn a month to              support new issues over the finishing
sure to get rid of a Pfandbrief in order to     spend. This is something, at least for the        line. However, the problem is the sover-
create liquidity for funds, at least at bid/    Pfandbrief part, which we do not really           eign debt crisis, and that also showed in
offer levels which are OK and don’t cause       like to see, to be frank — although I un-         the numbers from the first covered bond
us too much pain. Obviously the further         derstand the need for the ECB to go in            purchase programme: when the sovereign
south you turn in the covered bond mar-         and do a second round of covered bond             crisis kicked in with the downgrades of the
ket, the more difficulty you may have in        buying for the reason of financial stability.     sovereigns in southern parts of Europe,
creating liquidity and in selling paper.                                                          spreads went out again. I think it would
Especially at the peak of the crisis. And       Gipp: It could also be seen as a catalyst for     be too much to ask for the ECB to solve
that’s another reason why you cannot be         stabilisation. What we have seen is a great       the problems via a covered bond purchase
un-invested in Pfandbriefe in a normal,         period of stress not only in the primary          programme. The problems are elsewhere.
diversified covered bond mandate.               market, but also in the secondary market.
                                                I would agree with you to a certain extent        Day: How has the sovereign debt crisis
Day: What impact is CBPP2 having?               that in the primary market the Pfandbrief         affected public sector Pfandbriefe?
Diemer: The ECB covered bond pro-               in general is not in any great need of this       Buschmann: The attitude of investors
gramme is a very sensible tool to provide       support. In the secondary market, though,         has definitely changed. Investors want to
financial market stability. Pfandbriefe and     I think the ECB could actually play a very        look through the investment vehicle and
covered bonds are key refinancing instru-       important role in bringing it back to life,       want to know if it is a mortgage or public
ments for banks. The last covered bond          because that has been very subdued lately.        sector covered bond and what exactly the
purchase programme was very successful,         No investor, bank, whatever was able to           distribution of countries held in the public
also from the point of view of the central      really reinvigorate the secondary market.         sector cover pool looks like. The preference
bank, and I predict that the second pro-            But in the end, it all depends a little bit   for mortgage covered bonds has increased
gramme is going to be a similar success.        on the trust that the market needs to have        throughout the last year. A mortgage cov-
                                                in the covered bond asset class overall, not      ered bond is a diversifiying instrument in
Burmeister: It’s nice to have, but the          so much the Pfandbrief itself. And in that        your portfolio, compared with a public sec-


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tor covered bond where you have public             backed by such cover pools. In light of that,
exposure in the cover pool.                        the Pfandbrief has held up reasonably well
    One point related to the purchase pro-         so far. This is, I believe, based on the fact
gramme is that in 2009, when spreads had           that overall, as Jörg said, 80% on aggregate
been elevated due to a general banking             of the cover assets are German public sec-
crisis, there was little differentiation be-       tor exposure, which certainly helps.
tween affected countries. Now we are in
the middle of a sovereign crisis, which            Homey: Seven or so German Pfandbriefe
makes it difficult for the ECB to support          have been downgraded recently and in the
one particular asset class, like covered           majority of cases this was due to the de-
bonds. When managers decide on allo-               terioration of the issuer rating — rating
cations, the only important variable that          agencies keep on saying it’s not about the
they currently should look at is country           quality of the cover pool. However, in a
allocation. Whether you have a covered             few cases — and that is also new — they               Burmeister: “How viable is the
bond or a sovereign bond is currently not          point out that indeed the collateral qual-           business model of the public sector
so important due to the high correlations          ity or overcollateralisation level is not suf-                  financing?”
between the asset classes. Much more im-           ficient to maintain the target rating. So
portant is how much Spain, Portugal, Italy         from that perspective the issuer rating,         assets. But on the other hand, if an issuer
or Ireland you have in your portfolio. This        sovereign rating and covered bond rating         increases his Spanish or Italian debt —
is the decisive level of allocation right now      are all intertwined.                             even at these levels, with a 6%-7% yield —
— it’s the country weighting.                                                                       from 2% to 4% of the overall cover pool,
                                                   Day: Does Helaba have many foreign               the issuer will get beaten up, and in the
Day: Have we seen issuers doing any-               assets in its public sector cover pool?          end would lose more in terms of its fund-
thing in response to investors’ concerns?          Gipp: No, we only have a small portion           ing spread, because its whole curve might
Homey: From looking at Section 28 data             of foreign assets in our public sector cover     be affected, than it would gain on the par-
on the vdp’s webpage, it seems that issu-          pool and I’m grateful for that, because that     ticular investment in Spanish, Italian or
ers are removing Greece from cover pools.          subject has been an ongoing issue in our         whatsoever paper.
Obviously they are aware that investors            talks with investors in the last two years.         We have to ask critically how viable is
are looking at the exposure to peripheral          We have only 7% non-German exposure,             that business model going forward. If you
countries. But if you look at public sector        which is very small indeed, and that is          think about the large covered bond issu-
Pfandbriefe, on average 80% of the assets          something that we highlight whenever we          ers that faced individual crises — Depfa
are claims against German entities, so I           go out to investors. That’s also a key point     and DexMA come immediately to mind
think it’s fair to say that most of the cover      when we talk later on about transparency:        — they had large public sector exposures.
pools are genuine German risk, even if             it is important that you really give inves-
some have a larger amount of internation-          tors a clear indication of where you are         Tolckmitt: That’s without doubt going to
al exposure.                                       exposed to. We don’t have any rebalanc-          be one of the big issues moving beyond
    However, the rating agencies have              ing needs because the cover pool is OK           the crisis. And it has been a development
reacted. First of all, the downgrades of           and definitely above average, but I can          that has not only started in the crisis — it
sovereigns translate into higher credit            certainly understand any investor who is         started in 2000. If you look at issuance or
risks which they consider in their mod-            having a much more thorough look at the          outstandings of public sector Pfandbriefe
elling. Fitch, for example, downgraded             composition of cover pools than they have        since 2000, they have been consolidating
some public sector Pfandbriefe because of          in the past.                                     and they continue to consolidate. One of
that, and there are other examples outside                                                          the reasons that they continue to do so
Germany where the rating agencies have             Burmeister: Frankly, this raises a ques-         now is the crisis, but it is also upcoming
pointed out that the deteriorating credit          tion resulting from the whole sovereign          regulation.
quality of sovereigns has had an impact            crisis: how viable is the business model             We have seen difficulties well before
on the quality of cover pools.                     of the public sector financing? If you           the crisis in a certain area of public sec-
                                                   have 80% German exposure and if you              tor business, which can be called capi-
Tolckmitt: If you have an environment              look at the spreads of Bunds, KfW and            tal market based public sector business
where sovereigns are downgraded one                Bundesländer, it cannot be a viable busi-        where you basically buy bonds in the
by one and some of them are included in            ness model to refinance that kind of debt        capital markets and then refinance them
cover pools, anything else would be a little       through a public sector Pfandbrief, be-          via Pfandbriefe. As a consequence, we
bit astonishing. From some point onwards,          cause that would be simply by playing the        have for several years now been return-
it is certain to have an effect on the rating of   curve. So you need to have those higher          ing to smaller scale genuine public sec-
Pfandbriefe or other covered bonds that are        yielding assets, which are basically foreign     tor lending business. That is the original


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idea behind the public sector Pfandbrief:                                                        put together this data so that it is mean-
to bundle the funding needs of smaller                                                           ingful and so that investors have a clear
sized public entities and give them in-                                                          interpretation of it.
direct capital market access through is-
suing Pfandbriefe and bundling them in                                                           Buschmann: The problem is rather with
the cover pool. We are gradually return-                                                         other jurisdictions that do not have the
ing towards this business model, which                                                           quality and quantity of data that is pro-
means smaller sizes, which means we will                                                         vided under the German Pfandbrief leg-
not see the big Jumbo issues anymore that                                                        islation.
we saw before the crisis. But it’s a healthy                                                         If an investor doesn’t have access to es-
development and that is important.                                                               sential information, he tends to assume the
    I just wanted to add one important point                                                     worst case scenario because he thinks the
regarding the composition of cover pools,                                                        issuer might hide something. This is actu-
especially public sector cover pools: it’s not                                                   ally the worst outcome for issuers. Hence,
so long ago that rating agencies asked banks                                                     the transparency initiative is not only a
that had an 80% or 85% share of Germany in                                                       good thing for investors but also for issuers.
                                                       Gipp: “We are more and more
their cover pool to diversify internationally.          selling the entire credit story”
I am happy that they have reconsidered this                                                      Diemer: Yes, and what Martin said is
position, but the international exposure was      Day: Are you supportive of the CBIC            that transparency is not only limited to
a development that was to a certain extent        transparency standards initiative?             the cover pool, but to the whole balance
driven by the same rating agencies that are       Burmeister: Yes, sure. A colleague of          sheet. Aareal’s mortgage pool is highly di-
now criticising the share of foreign assets in    ours has been working on that, too.            versified from a geographic point of view:
the same cover pools.                                 The good thing about this initiative is    we have 20 different countries within our
                                                  that for the first time you have something     pool. This reflects our business model:
Day: What is the composition of Hela-             on a European level that can make things       we have been doing international com-
ba’s pool?                                        more comparable. You have lots of differ-      mercial real estate lending for the last 20
Gipp: It is granular, and very much re-           ent data sources — and obviously your          years, and every investor is well aware that
gionally focused in Hessen and Thuringia          company is offering a service as well —        investing in Aareal paper also means en-
— our home turf. And yes, a couple of             you have the ECBC Factbook, etc. But the       gaging with this international commercial
years ago the rating agencies were point-         real problem kicks in if you try to com-       real estate lending portfolio. And there-
ing their fingers at this domestic exposure       pare, say, a Spanish pool with a German        fore transparency plays an important role
and arguing that we have a high level of          one. Notwithstanding the time limits and       for our investors.
concentration risk there. Now this “con-          frequency of data you get, sometimes you
centration” is proving extremely valuable.        have different definitions of what is com-     Burmeister: Just to clarify: it’s a Euro-
    Overall, what Jens said is very impor-        mercial, what is residential mortgages,        pean topic and obviously Germany’s Sec-
tant. The business model is what is driving       and so forth and so on.                        tion 28 has always been good and up to
the strength of the product you can actu-             That’s basically the reason why we ab-     date. We have some other issuers, more in
ally sell. We are not only selling covered        solutely like this initiative, because you     the Nordic region, which also have decent
bonds; we are more and more selling the           have questions regarding the issuer and        transparency, and also some UK issuers,
entire credit story, the business model of        the bank, and about the cover pool.            just to mention a few. But in most cases
the bank, either through a Pfandbrief or              I could foresee issuers having to pay up   it’s not a common standard and it’s not
a senior unsecured issue or whatever that         in terms of spread if they don’t follow such   enforced by law. This is why we absolutely
might be. But ultimately the investor has         industry standards. This is really some-       welcome this initiative.
to look at the entire composition of your         thing at the heart of what we do, which we
balance sheet. When you have a funding            as investors can really look at and say: OK,   Tolckmitt: Providing transparency cre-
composition like us, where the Pfandbrief         are they delivering? What do they deliver?     ates a win-win situation. We as Pfand-
makes up less than 25% of our overall me-         With what frequency? And do we like what       brief issuers have been committed to
dium and long term funding, it provides a         we see in the data we are getting?             transparency since 2005 when we first
good indication that we have to do other                                                         enacted Section 28 of our law. Our aim
profitable business in order to be able to        Diemer: The German Pfandbrief legisla-         was to make investors less reliant on rat-
do 75% of our funding elsewhere, and this         tion is leading from a European perspec-       ing agencies, and if you want to do that,
composition and business model has to be          tive when it comes to transparency. And        you have to provide transparency. Going
made clear to investors. The cover pool in        at Aareal, we welcome further improve-         back to the figures we discussed previ-
itself gives you a lot of indications, but it’s   ments. However, it is important that it is     ously: only if investors know that on aver-
not the full picture.                             unambiguously stated how issuers should        age 80% of public sector cover pools are


34    The Covered Bond Report Jan/Feb 2012
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German public sector exposure, and only
if they can look at how German issuers
have reduced their PIIGS exposure over
time, only then will they feel comfortable
with the product, and therefore may not
blindly follow rating agencies’ advice. That
is very important and that is why we also
appreciate greatly the initiative taken by
the CBIC on a European level.
    What is very important, though — and
I think the CBIC would also acknowledge
this — is that you have to differentiate with
regard to the level and detail of transparen-
cy between different investor bases. Highly
sophisticated international investors who
are not necessarily as familiar with the               Buschmann: “The transparency initiative is not only
Pfandbrief as a traditional German investor              a good thing for investors but also for issuers”
would ask for more cover pool data than a
typical Pfandbrief investor. We review our        spend on the research capacity necessary to     LTVs, as a property lender I can give you
transparency requirements regularly and           look at all the pool data.                      five different LTV definitions right now.
our principle in approaching this is to ask           Then if you look at the UK, it’s the cen-
every investor that we meet — and we meet         tral bank demanding loan by loan data for       Tolckmitt: We are already working on
a lot of investors — what they would like         eligibility. I’m not predicting that we will    the next amendment of our law, which we
to add to our Section 28, and then out of         ultimately get that requirement for the         hope will pass in 2013, and the majority
all the answers we distil what a majority of      whole covered bond market — indeed it’s         of the issues that you just mentioned are
the investors say and we try to put that in       a bit of a distraction because it is moving     on our agenda for inclusion in Section 28.
our legal framework. It is especially small       away from the credit and the issuer itself      Again, it shows that increasing transpar-
and mid-sized investors for whom Section          — but it shows at least the direction we        ency on a step by step basis and in discus-
28 is made, because they have to rely on a        are going in and even the CBIC initiative       sions with investors — without a big bang
legal framework. And it is very often those       is probably not the end of the road.            as suggested by the UK government or the
investors from which you get the answer                                                           CBIC — is quite a promising way to do it.
that they don’t necessarily need or want          Homey: Transparency is one thing; the
more information, but perhaps more con-           other thing is supervision, and the strict      Buschmann: We definitely need this
sistent or comparable information, or more        German supervision through BaFin and            transparency, not only in the covered
timely information. And so you really have        through the cover pool monitor. This adds       bond market, in the Pfandbrief market;
a broad range of investors with different         comfort, at least from my perspective.          we need it in the whole banking industry.
needs, and you have to answer all their               But if you are looking at possible im-      Just looking back at what happened in the
needs, not only those of investors seeking        provements, investors are very interested       past, you realise that for years there have
loan by loan information on the cover pool.       in LTV distribution data, and also the          been risks that were not adequately priced
The CBIC is representing big international        seasoning of the loans. It should be very       in the market because of a lack of infor-
investors, and they clearly have the tools        straightforward to provide this informa-        mation and a lack of transparency. What
necessary to analyse this and they want to        tion, and also the maturity of assets —         investors are doing right now is asking for
know it, but it is not necessarily the case for   both the average by the time to maturity        more information in order to be able to
each and every investor.                          and the time to reset — and this also by        build up confidence again, to regain the
                                                  interest rate type — fixed or floating rate.    trust that they have lost during the crisis.
Burmeister: That is a strength of the cov-        If you could shed a little bit more light on    If one wants to re-establish functioning
ered bond market: you have these highly           that, I would be delighted.                     markets, one needs to regain this trust.
sophisticated international investors and                                                         Therefore we need this transparency.
then a second and third tier of investors.        Diemer: The interpretation of these con-
But there is a kind of free riding taking         cepts needs to be the same for each and         Day: The ECBC’s labelling initiative
place on the investor side with smaller in-       every issuer and there needs to be some         — will it enter into investors’ decision-
vestors saying that if the larger players are     sort of quality management by the vdp           making?
subscribing to new issues and are fine with       for German banks and the ECBC for Eu-           Burmeister: No, because we will always
the name, then they can take Eu1m, Eu2m,          ropean issuers to ensure that the data is       make up our own mind what is a covered
Eu5m or whatever, too. They don’t want to         collected in a similar way. With regard to      bond and what is a covered bond we would


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                                                                                                    a consequence the attractiveness of the
                                                                                                    product to a certain extent rests on regula-
                                                                                                    tory implications.
                                                                                                        In all the evolving regulatory frame-
                                                                                                    works — Basel, Solvency, bail-in, UCITS
                                                                                                    — we have a preferential treatment for
                                                                                                    covered bonds. And there are not many
                                                                                                    preferential treatments in these regulatory
                                                                                                    initiatives at all. It is clear to me that this
                                                                                                    will bring covered bonds under the scruti-
                                                                                                    ny of regulators over time, asking whether
                                                                                                    they still deserve preferential treatment,
                                                                                                    especially as in the next years the covered
                                                                                                    bond universe will very likely have wid-
                                                                                                    ened further still. Therefore it is one of the
                                                                                                    core interests of the industry, especially
                                                                                                    of the traditional covered bond industry,
                                                                                                    to work on such a differentiation, and to
                                                                                                    work on differentiation that bites.

                                                                                                    Day: Rumour has it that German struc-
                               Diemer: “The interpretation of these concepts needs to
                                                                                                    tured covered bonds are on the horizon.
                                     be the same for each and every issuer”                         Would Helaba or Aareal consider struc-
                                                                                                    tured covered bonds to be of interest?
like to be invested in. As far as I understand     set classes. In such an environment a label      Diemer: We offer established capital
the label, it’s a UCITS definition of a covered    that can ring-fence the traditional high         markets products. These are Pfandbriefe,
bond plus a certain transparency require-          quality asset class can be of value.             senior notes, deposits and our share.
ment. It’s nice to have and if you follow that         For this to be achieved, it is key that      There is no intention to offer anything like
route, it might be nice to introduce it, but       such a label has teeth. Whenever you de-         a structured covered bond. In our discus-
that is not freeing us as investors from the       fine criteria, there has to be a certain like-   sions with investors, it’s extremely im-
duty of really doing our credit work.              lihood that there will be covered bonds          portant for them that an issuer can dem-
    I don’t know if they have tried to establish   that will not fulfil the criteria, otherwise     onstrate that it can rely on a diversified
a link to the ECB or something like that —         a label is not really of much added value.       refinancing base. The role played by de-
there were ideas to do so. It does make a dif-     That is the challenge in the European con-       posits or the role played by our footprint
ference if you say a covered bond is UCITS         text, finding a definition that actually ful-    in the Schuldschein market is an impor-
compliant or not, it has implications for our      fils this requirement.                           tant aspect for our investors. The current
portfolios, whether it is CRD compliant or                                                          diversification we have on the liability side
not. But the ECBC is not an official body.          “And now they are                               is sufficient for our capital markets access.

Homey: I very much agree. Perhaps it is
                                                     perhaps trying to                              Gipp: For Helaba this product is not of
an attempt to establish a new brand like              establish a new                               any interest at all.
Pfandbrief. Everyone knows what quality
a Pfandbrief is, and now they are perhaps
                                                   quality standard on a                                I think it is actually very much a
                                                                                                    function of what you want to substitute
trying to establish a new quality standard           European basis.”                               through any structured covered bond
on a European basis.                                                                                funding. I personally see it as a substitute
                                                       This is important both for investors         for senior unsecured funding, also from a
Tolckmitt: In general, we welcome the              and also from a regulatory perspective.          pricing point of view, and not for covered
idea of such a label, in such an environ-          Only if you can make a convincing point          bond funding. So it could potentially be a
ment. First of all, post-crisis, a number          to regulators that what you are defining         valuable instrument for those banks that
of jurisdictions are considering setting           is really a high quality asset class will you    do not have access to the senior unsecured
up covered bond laws that might not be             receive regulatory relief or preferential        market, who have a very specialised busi-
the same as the classic European ones, the         treatment. And only if you have this kind        ness model or who do not have alternative
US in particular. And secondly, issuers            of preferential treatment will the label be      funding possibilities. But due in particu-
of all kinds are interested in transferring        widely accepted by issuers because in-           lar to the three year ECB tender that was
the idea of covered funding to other as-           vestors are paying attention to it, and as       announced in December and that will be


36    The Covered Bond Report Jan/Feb 2012
THE PFANDBRIEF ROUNDTABLE 2012




carried out again in February, this need       probably not have far reaching effects. It    some large investors that cannot buy our
for alternative senior unsecured funding       may be a good thing going forward when        quality product due to the fact that we just
at attractive costs has more or less van-      we are in calmer waters, but right now it     offer Eu500m transactions. We work with
ished, so I don’t think this instrument will   doesn’t help us too much.                     those investors that are ready to invest in
find very much interest.                           It comes down to the banks deleverag-     Eu500m transactions.
    Another point which I see as extremely     ing and reducing the size of their trading
crucial with regard to the use of structured   books, whether they are willing and able      Buschmann: Fact is that investors are
covered bonds is the tranching of balance      to take positions.                            liquidity takers and they cannot do much
sheets, which puts the senior unsecured                                                      about improving liquidity. It’s more up
investor in a more and more subordinated        “Covered bonds will                          to the market-makers to develop more
position, and that is something that banks
should be generally very, very careful
                                                in my view certainly                         sophisticated risk management tools and
                                                                                             free up risk budgets again for their trad-
with. Ultimately that could have negative          not be the new                            ing books, then to apply these changes
effects on the rating, and would then af-
fect your entire product offering right up
                                                 unsecured. That to                          and show a commitment to the covered
                                                                                             bond product. Then liquidity would be
to covered bonds.                                me is quite clear.”                         able to come back. Maybe not to the levels
                                                                                             we have seen years ago, but it might come
Tolckmitt: If you look at the current dif-     Tolckmitt: It was never expected that         back to levels that are reasonable for in-
ficult funding situation, especially in the    market liquidity would increase dramati-      vestors willing to trade.
unsecured sector, there is a certain logic     cally the day we launched the initiative.
in looking for other funding instruments           We have been looking at how to in-        Burmeister: It perhaps also comes back to
perhaps based on the idea of covered           crease transparency because from an           the issuers choosing syndicate banks that are
funding, particularly given their preferen-    investor’s point of view — and maybe          providers of secondary market liquidity.
tial treatment. But it would be wrong to       not the sophisticated investors, but the
assume that any of this preferential treat-    overall investor base — price transpar-       Gipp: It is not only a matter of investors
ment would extend to structured covered        ency was one of the main areas where          asking for liquidity and of issuers provid-
bonds. None of it will.                        investors were critical of the Pfandbrief     ing backstop liquidity. Indeed you have to
    Furthermore, to answer a question raised   market during the crisis. They said that      be comfortable with the syndicate you are
in many discussions recently, covered bonds    one of the differentiating aspects of the     choosing, and also you have to be very com-
will in my view certainly not be the new un-   Pfandbrief market relative to other cov-      fortable with the placement of your bonds.
secured. That to me is quite clear.            ered bond markets was that they could         A strong trend that we have seen in the past
    From an issuer’s point of view, you        always get in and out of positions in         couple of years is placement with more or
will always look at the cost of your overall   this market, even in the worst of times,      less buy and hold investors. Not buy and
funding mix, and I am pretty convinced         but they were not satisfied with price        hold forever, but for a longer period of time
that a heavy use of structured covered         transparency at times. And given that         than previously, so for those investors the
bonds will have negative effects on unse-      we know that the classic fixed bid/offer      need for quick in-and-out trading is not as
cured funding and that, as a consequence,      spread market-making will not return,         crucial as it was a couple of years ago.
the overall funding costs will not neces-      we thought about ways of increasing this          The discussion about issue size is very
sarily be lower than without them.             transparency and that is where this ini-      much a matter for investors and their
                                               tiative should help, by giving investors an   general investment principles. Currently
Day: The vdp in January started pub-           indication of where the market is.            the world is divided into more or less two
lishing average spread data on Jumbos.                                                       factions, with a portion of investors being
How might this make a difference to the        Day: Tammo, your benchmark was                able to buy Eu500m issues and others still
secondary market?                              Eu500m and so was the previous one.           needing Eu1bn issues as a minimum to in-
Burmeister: I don’t want to discourage         What is your view on the difference in        vest. From an asset-liability management
the vdp from continuing in that respect        terms of how that affects the price you       point of view it would be desirable to have
— and besides transparency to work on          get, what investors you get, and what         more rather than less investors who can
other things to increase the tradability of    that might reflect in terms of liquidity?     buy smaller sized issues. That would make
the product — but frankly speaking when        Diemer: In the last few years it has been     ALM management for banks easier. iBoxx
it comes down to investing it’s fair to say    the issuer’s responsibility in particular     has shown a little bit the way by now add-
that issue size, geographic area, and un-      to provide a certain backstop liquidity       ing Eu500m issues into their benchmark,
derlying assets are important — you can        to the investor base and also to its mar-     and if more and more investors follow
see this reflected in where and how wide       ket partners, the lead managers. As you       these indices, maybe that will help to pave
bid/offer spreads are — but in the current     mentioned, we consistently issue Eu500m       the way for smaller issues to be treated as
market environment the vdp initiative will     transactions, and you are right, there are    being as liquid as Eu1bn issues.


                                                                                       Jan/Feb 2012 The Covered Bond Report 37
An equation that always works. Even in troubled times, the
Pfandbrief is an especially sound investment with a tried and tested market infrastructure.

In Germany and abroad, investors appreciate its first-class quality and the yield pick-up.

Attributes it owes to the stringent German Pfandbrief Act and a strong interest group that

ensures the Pfandbrief stays the benchmark on the Covered Bond market.

For more information, go to: www.pfandbrief.org




                                                                                                    simply pfandbrief
                                                                                                    simply good

Aareal Bank + BayernLB + Berlin Hyp + Bremer Landesbank + Commer zbank + CORE ALCREDIT BANK + DekaBank + Deut sche Apotheker- und Är ztebank +
Deut sche Hypo + Deut sche P fandbriefbank + Deut sche Schif fsbank + Dexia Kommunalbank + DG HYP + DKB + Düsseldor fer Hypothekenbank + DVB Bank +
Eurohypo + Hamburger Sparkasse + Helaba Landesbank Hessen-Thüringen + HSH Nordbank + IKB Deutsche Industriebank + ING-DiBa + Kreissparkasse Köln +
LBB Landesbank Berlin + LBBW + Münchener Hyp + NORD/LB + Postbank + SaarLB + Santander Consumer Bank + SEB + Sparkasse KölnBonn + UniCredit Bank +
VALOVIS BANK + WarburgHyp + Westdeutsche ImmobilienBank + WestLB + WL BANK + Wüstenrot Bank = ASSOCIATION OF GERMAN PFANDBRIEF BANKS

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The Pfandbrief Roundtable 2012

  • 1. THE PFANDBRIEF ROUNDTABLE 2012 The Pfandbrief Roundtable 2012 German covered bond issuers have been shielded from the worst of the sovereign debt crisis, but nevertheless share the several challenges faced by the broader asset class. In this roundtable sponsored by the Association of German Pfandbrief Banks (vdp), leading market participants gathered in Frankfurt in mid-January to discuss how the industry is tackling issues such as transparency and liquidity, and how they see the Pfandbrief faring in the face of developments in collateral quality and regulation. Neil Day, The Covered Bond Re- be higher if market conditions in general Day: What can we expect from Helaba? port: What are expectations for Pfand- improve over the year. Martin Gipp, Helaba: We have been brief issuance this year? active in the public Pfandbrief market Jens Tolckmitt, vdp: The results of our Day: Aareal issued in the second week since 2010 with benchmark issues. Before annual survey of vdp members showed of January. Tammo, were you expecting that we more or less focused on the private that they plan to issue around Eu74bn of to come to the market as early as that? placement market. Pfandbriefe. Most of this, about Eu43bn, Tammo Diemer, Aareal: It’s the first Our funding needs are usually in the will likely be mortgage Pfandbriefe, which time Aareal has actually opened the Pfand- area of Eu10bn-Eu13bn. Last year we is- is the continuation of a trend that we have brief market. Our plans were to come pretty sued about Eu12bn overall and the fore- seen for the last few years, with mortgage early in the year and it turned out to be the cast for this year is around Eu13bn, and Pfandbriefe being the dominant part of right decision to come with a quality prod- of that we expect to do about Eu7bn in overall Pfandbrief issuance. Eu29bn have uct with a medium term maturity, as we Pfandbrief issuance. We will be active on been announced as public Pfandbriefe had a very strong order book. We priced a both sides, mortgage Pfandbriefe as well and Eu2bn as ship Pfandbriefe. Eu500m transaction and had Eu900m of as public sector Pfandbriefe. As we have That Eu74bn is less than last year, honest orders, with a granular book of more pretty large cover pools and collateral when we expected Eu90bn. But due to than 80 different accounts. We had a strong available, this amount of issuance should the extremely difficult market conditions, demand from Germany and central banks. be feasible. we ended up with only Eu70bn in 2011. We will have a pretty normal year regard- In what form that will be done depends Based on that and the still adverse mar- ing Pfandbrief issuance, meaning Eu1.5bn- very much on market conditions. Markets ket situation in the government sector this Eu2bn of mortgage Pfandbriefe, and we will have been very volatile. We are always a very higher estimate is quite a positive signal be visible with two or three Eu500m trans- price conscious house, so we are choosing for the Pfandbrief market and it may even actions, including the one we just issued. the economically most sensible way for us. 30 The Covered Bond Report Jan/Feb 2012
  • 2. THE PFANDBRIEF ROUNDTABLE 2012 We have maturing Jumbo Pfandbriefe Participants: of roughly Eu42bn this year and I would expect, based on the numbers that have been cited, perhaps Eu20bn in jumbos to be a sensible estimate. One more thing: you have mentioned Ralf Burmeister, mortgage, public and ship Pfandbrief — senior portfolio perhaps we will next see aircraft Pfand- manager, DB briefe. I’m not sure if that will be a bench- Advisors mark, but we will have a greater diversity of products. Ralf Burmeister, DB Advisors: It’s a Robin little bit of a pain from the investor side Buschmann, when issuers are price sensitive. It is abso- senior portfolio lutely fair, but when it comes to maturity, manager, DB Advisors we would love to buy longer dated paper, 10-15 years, but there is not too much is- suance, especially in benchmarks: you can use private placements. The private place- ments are obviously targeted at a certain investor base — which is fine, it gives you Tammo Diemer, a stable funding base and we love stable head of treasury, issuers, no doubt about that — but we Aareal Bank tend to have some difficulties, especially at the long end of the curve, in finding good German quality. So when you talk about Eu75bn or so, it sounds impressive, but breaking it down to new issuance in jumbos or benchmarks, Martin Gipp, head of funding, it’s considerably less. Helaba Tolckmitt: It is. I would agree with Jörg’s But for a targeted amount of Eu7bn this estimate that Jumbo issuance will be year, it’s fair to assume that we will be in the around Eu20bn — although that is not benchmark segment this year again at least based on our survey. It really is a difficult Jörg Homey, once or twice, maybe even three times de- number to predict. It depends a lot on the head of covered pending on market conditions. overall market conditions in the capital bond research, markets. If they are good, there will be a DZ Bank Jörg Homey, DZ Bank: Forecasts are larger number of Jumbos. If it is difficult, particularly difficult this year for several it’s maybe less. reasons. One is that banks are deleverag- If you look at last year, for example, ing, which is obviously impacting their re- by mid-year we had almost reached our Jens Tolckmitt, financing needs. Then, secondly, universal estimate of Eu22bn and with conditions chief executive, banks in particular can refinance them- so difficult in the second half of 2011 we Association of selves via deposits. And ECB-supplied sup- ended up with Eu25bn. German Pfand- brief Banks (vdp) port via the three year refinancing tender is available if banks need liquidity and it is, Day: What are expectations for the per- let’s say, not economically feasible to refi- formance of Pfandbriefe? nance via the markets due to high spreads. Robin Buschmann, DB Advisors: We So for those reasons it’s very difficult to always look at risk-return profiles, for any predict a concrete number, so it could be bond, and in regard to Pfandbriefe, you Neil Day, managing editor, anything between, if you are looking at definitely have a lower risk profile, but you The Covered benchmarks, Eu100bn-Eu200bn this year also get a much lower return. The market Bond Report for covered bonds overall. currently focuses on the risk component Jan/Feb 2012 The Covered Bond Report 31
  • 3. THE PFANDBRIEF ROUNDTABLE 2012 respect support from the ECB could be extremely helpful. Tolckmitt: I would fully agree with this no- tion that it is a very important tool for the overall covered bond market. I would also agree with the fact that there are other coun- tries and other covered bond jurisdictions that might need it more than the Pfandbrief, much more than the Pfandbrief. But I think if you look at the aims that the ECB announced for the first purchase programme, they were not only to get the covered bond market going again, but to Tolckmitt: “Higher estimate is quite a positive signal use the covered bond market as an initial for the Pfandbrief market” market for getting the overall funding markets going again, and in the first round rather than the return component. From question is whether the Pfandbrief in it worked quite well. this perspective — and from our clients’ particular is in need of such additional You can see certain limited spread re- perspective, too, as they are quite risk support. Back in early 2009, right before actions to the second covered bond pur- averse at the moment — Pfandbriefe are the first programme, we had triple-digit chase programme in the covered bond attractive investments. Compared with spreads for Pfandbriefe, but even then market, too. It has not spread, as far as I the overall covered bond market Pfand- banks could issue. It is not the case for see it, to other markets, but I think there is briefe don’t look appealing just looking some peripheral countries right now even one very important difference that makes at the return figures. If you consider both if the ECB can take a part of their issue. it more difficult to make this programme components, risk and return figure, they So, yes, it’s nice to have and of course as successful as the first one: it’s a totally are definitely one investment that you it is their mandate to ensure financial different macroeconomic environment. have to have in your portfolio. stability, but from a pure, let’s say, micro perspective, they are crowding out us lit- Homey: I totally agree. The covered bond Burmeister: The other thing is tradabil- tle covered bond investors, being a forced purchase programme most certainly helps ity. Not necessarily liquidity, but we can be buyer with almost Eu3.5bn a month to support new issues over the finishing sure to get rid of a Pfandbrief in order to spend. This is something, at least for the line. However, the problem is the sover- create liquidity for funds, at least at bid/ Pfandbrief part, which we do not really eign debt crisis, and that also showed in offer levels which are OK and don’t cause like to see, to be frank — although I un- the numbers from the first covered bond us too much pain. Obviously the further derstand the need for the ECB to go in purchase programme: when the sovereign south you turn in the covered bond mar- and do a second round of covered bond crisis kicked in with the downgrades of the ket, the more difficulty you may have in buying for the reason of financial stability. sovereigns in southern parts of Europe, creating liquidity and in selling paper. spreads went out again. I think it would Especially at the peak of the crisis. And Gipp: It could also be seen as a catalyst for be too much to ask for the ECB to solve that’s another reason why you cannot be stabilisation. What we have seen is a great the problems via a covered bond purchase un-invested in Pfandbriefe in a normal, period of stress not only in the primary programme. The problems are elsewhere. diversified covered bond mandate. market, but also in the secondary market. I would agree with you to a certain extent Day: How has the sovereign debt crisis Day: What impact is CBPP2 having? that in the primary market the Pfandbrief affected public sector Pfandbriefe? Diemer: The ECB covered bond pro- in general is not in any great need of this Buschmann: The attitude of investors gramme is a very sensible tool to provide support. In the secondary market, though, has definitely changed. Investors want to financial market stability. Pfandbriefe and I think the ECB could actually play a very look through the investment vehicle and covered bonds are key refinancing instru- important role in bringing it back to life, want to know if it is a mortgage or public ments for banks. The last covered bond because that has been very subdued lately. sector covered bond and what exactly the purchase programme was very successful, No investor, bank, whatever was able to distribution of countries held in the public also from the point of view of the central really reinvigorate the secondary market. sector cover pool looks like. The preference bank, and I predict that the second pro- But in the end, it all depends a little bit for mortgage covered bonds has increased gramme is going to be a similar success. on the trust that the market needs to have throughout the last year. A mortgage cov- in the covered bond asset class overall, not ered bond is a diversifiying instrument in Burmeister: It’s nice to have, but the so much the Pfandbrief itself. And in that your portfolio, compared with a public sec- 32 The Covered Bond Report Jan/Feb 2012
  • 4. THE PFANDBRIEF ROUNDTABLE 2012 tor covered bond where you have public backed by such cover pools. In light of that, exposure in the cover pool. the Pfandbrief has held up reasonably well One point related to the purchase pro- so far. This is, I believe, based on the fact gramme is that in 2009, when spreads had that overall, as Jörg said, 80% on aggregate been elevated due to a general banking of the cover assets are German public sec- crisis, there was little differentiation be- tor exposure, which certainly helps. tween affected countries. Now we are in the middle of a sovereign crisis, which Homey: Seven or so German Pfandbriefe makes it difficult for the ECB to support have been downgraded recently and in the one particular asset class, like covered majority of cases this was due to the de- bonds. When managers decide on allo- terioration of the issuer rating — rating cations, the only important variable that agencies keep on saying it’s not about the they currently should look at is country quality of the cover pool. However, in a allocation. Whether you have a covered few cases — and that is also new — they Burmeister: “How viable is the bond or a sovereign bond is currently not point out that indeed the collateral qual- business model of the public sector so important due to the high correlations ity or overcollateralisation level is not suf- financing?” between the asset classes. Much more im- ficient to maintain the target rating. So portant is how much Spain, Portugal, Italy from that perspective the issuer rating, assets. But on the other hand, if an issuer or Ireland you have in your portfolio. This sovereign rating and covered bond rating increases his Spanish or Italian debt — is the decisive level of allocation right now are all intertwined. even at these levels, with a 6%-7% yield — — it’s the country weighting. from 2% to 4% of the overall cover pool, Day: Does Helaba have many foreign the issuer will get beaten up, and in the Day: Have we seen issuers doing any- assets in its public sector cover pool? end would lose more in terms of its fund- thing in response to investors’ concerns? Gipp: No, we only have a small portion ing spread, because its whole curve might Homey: From looking at Section 28 data of foreign assets in our public sector cover be affected, than it would gain on the par- on the vdp’s webpage, it seems that issu- pool and I’m grateful for that, because that ticular investment in Spanish, Italian or ers are removing Greece from cover pools. subject has been an ongoing issue in our whatsoever paper. Obviously they are aware that investors talks with investors in the last two years. We have to ask critically how viable is are looking at the exposure to peripheral We have only 7% non-German exposure, that business model going forward. If you countries. But if you look at public sector which is very small indeed, and that is think about the large covered bond issu- Pfandbriefe, on average 80% of the assets something that we highlight whenever we ers that faced individual crises — Depfa are claims against German entities, so I go out to investors. That’s also a key point and DexMA come immediately to mind think it’s fair to say that most of the cover when we talk later on about transparency: — they had large public sector exposures. pools are genuine German risk, even if it is important that you really give inves- some have a larger amount of internation- tors a clear indication of where you are Tolckmitt: That’s without doubt going to al exposure. exposed to. We don’t have any rebalanc- be one of the big issues moving beyond However, the rating agencies have ing needs because the cover pool is OK the crisis. And it has been a development reacted. First of all, the downgrades of and definitely above average, but I can that has not only started in the crisis — it sovereigns translate into higher credit certainly understand any investor who is started in 2000. If you look at issuance or risks which they consider in their mod- having a much more thorough look at the outstandings of public sector Pfandbriefe elling. Fitch, for example, downgraded composition of cover pools than they have since 2000, they have been consolidating some public sector Pfandbriefe because of in the past. and they continue to consolidate. One of that, and there are other examples outside the reasons that they continue to do so Germany where the rating agencies have Burmeister: Frankly, this raises a ques- now is the crisis, but it is also upcoming pointed out that the deteriorating credit tion resulting from the whole sovereign regulation. quality of sovereigns has had an impact crisis: how viable is the business model We have seen difficulties well before on the quality of cover pools. of the public sector financing? If you the crisis in a certain area of public sec- have 80% German exposure and if you tor business, which can be called capi- Tolckmitt: If you have an environment look at the spreads of Bunds, KfW and tal market based public sector business where sovereigns are downgraded one Bundesländer, it cannot be a viable busi- where you basically buy bonds in the by one and some of them are included in ness model to refinance that kind of debt capital markets and then refinance them cover pools, anything else would be a little through a public sector Pfandbrief, be- via Pfandbriefe. As a consequence, we bit astonishing. From some point onwards, cause that would be simply by playing the have for several years now been return- it is certain to have an effect on the rating of curve. So you need to have those higher ing to smaller scale genuine public sec- Pfandbriefe or other covered bonds that are yielding assets, which are basically foreign tor lending business. That is the original Jan/Feb 2012 The Covered Bond Report 33
  • 5. THE PFANDBRIEF ROUNDTABLE 2012 idea behind the public sector Pfandbrief: put together this data so that it is mean- to bundle the funding needs of smaller ingful and so that investors have a clear sized public entities and give them in- interpretation of it. direct capital market access through is- suing Pfandbriefe and bundling them in Buschmann: The problem is rather with the cover pool. We are gradually return- other jurisdictions that do not have the ing towards this business model, which quality and quantity of data that is pro- means smaller sizes, which means we will vided under the German Pfandbrief leg- not see the big Jumbo issues anymore that islation. we saw before the crisis. But it’s a healthy If an investor doesn’t have access to es- development and that is important. sential information, he tends to assume the I just wanted to add one important point worst case scenario because he thinks the regarding the composition of cover pools, issuer might hide something. This is actu- especially public sector cover pools: it’s not ally the worst outcome for issuers. Hence, so long ago that rating agencies asked banks the transparency initiative is not only a that had an 80% or 85% share of Germany in good thing for investors but also for issuers. Gipp: “We are more and more their cover pool to diversify internationally. selling the entire credit story” I am happy that they have reconsidered this Diemer: Yes, and what Martin said is position, but the international exposure was Day: Are you supportive of the CBIC that transparency is not only limited to a development that was to a certain extent transparency standards initiative? the cover pool, but to the whole balance driven by the same rating agencies that are Burmeister: Yes, sure. A colleague of sheet. Aareal’s mortgage pool is highly di- now criticising the share of foreign assets in ours has been working on that, too. versified from a geographic point of view: the same cover pools. The good thing about this initiative is we have 20 different countries within our that for the first time you have something pool. This reflects our business model: Day: What is the composition of Hela- on a European level that can make things we have been doing international com- ba’s pool? more comparable. You have lots of differ- mercial real estate lending for the last 20 Gipp: It is granular, and very much re- ent data sources — and obviously your years, and every investor is well aware that gionally focused in Hessen and Thuringia company is offering a service as well — investing in Aareal paper also means en- — our home turf. And yes, a couple of you have the ECBC Factbook, etc. But the gaging with this international commercial years ago the rating agencies were point- real problem kicks in if you try to com- real estate lending portfolio. And there- ing their fingers at this domestic exposure pare, say, a Spanish pool with a German fore transparency plays an important role and arguing that we have a high level of one. Notwithstanding the time limits and for our investors. concentration risk there. Now this “con- frequency of data you get, sometimes you centration” is proving extremely valuable. have different definitions of what is com- Burmeister: Just to clarify: it’s a Euro- Overall, what Jens said is very impor- mercial, what is residential mortgages, pean topic and obviously Germany’s Sec- tant. The business model is what is driving and so forth and so on. tion 28 has always been good and up to the strength of the product you can actu- That’s basically the reason why we ab- date. We have some other issuers, more in ally sell. We are not only selling covered solutely like this initiative, because you the Nordic region, which also have decent bonds; we are more and more selling the have questions regarding the issuer and transparency, and also some UK issuers, entire credit story, the business model of the bank, and about the cover pool. just to mention a few. But in most cases the bank, either through a Pfandbrief or I could foresee issuers having to pay up it’s not a common standard and it’s not a senior unsecured issue or whatever that in terms of spread if they don’t follow such enforced by law. This is why we absolutely might be. But ultimately the investor has industry standards. This is really some- welcome this initiative. to look at the entire composition of your thing at the heart of what we do, which we balance sheet. When you have a funding as investors can really look at and say: OK, Tolckmitt: Providing transparency cre- composition like us, where the Pfandbrief are they delivering? What do they deliver? ates a win-win situation. We as Pfand- makes up less than 25% of our overall me- With what frequency? And do we like what brief issuers have been committed to dium and long term funding, it provides a we see in the data we are getting? transparency since 2005 when we first good indication that we have to do other enacted Section 28 of our law. Our aim profitable business in order to be able to Diemer: The German Pfandbrief legisla- was to make investors less reliant on rat- do 75% of our funding elsewhere, and this tion is leading from a European perspec- ing agencies, and if you want to do that, composition and business model has to be tive when it comes to transparency. And you have to provide transparency. Going made clear to investors. The cover pool in at Aareal, we welcome further improve- back to the figures we discussed previ- itself gives you a lot of indications, but it’s ments. However, it is important that it is ously: only if investors know that on aver- not the full picture. unambiguously stated how issuers should age 80% of public sector cover pools are 34 The Covered Bond Report Jan/Feb 2012
  • 6. THE PFANDBRIEF ROUNDTABLE 2012 German public sector exposure, and only if they can look at how German issuers have reduced their PIIGS exposure over time, only then will they feel comfortable with the product, and therefore may not blindly follow rating agencies’ advice. That is very important and that is why we also appreciate greatly the initiative taken by the CBIC on a European level. What is very important, though — and I think the CBIC would also acknowledge this — is that you have to differentiate with regard to the level and detail of transparen- cy between different investor bases. Highly sophisticated international investors who are not necessarily as familiar with the Buschmann: “The transparency initiative is not only Pfandbrief as a traditional German investor a good thing for investors but also for issuers” would ask for more cover pool data than a typical Pfandbrief investor. We review our spend on the research capacity necessary to LTVs, as a property lender I can give you transparency requirements regularly and look at all the pool data. five different LTV definitions right now. our principle in approaching this is to ask Then if you look at the UK, it’s the cen- every investor that we meet — and we meet tral bank demanding loan by loan data for Tolckmitt: We are already working on a lot of investors — what they would like eligibility. I’m not predicting that we will the next amendment of our law, which we to add to our Section 28, and then out of ultimately get that requirement for the hope will pass in 2013, and the majority all the answers we distil what a majority of whole covered bond market — indeed it’s of the issues that you just mentioned are the investors say and we try to put that in a bit of a distraction because it is moving on our agenda for inclusion in Section 28. our legal framework. It is especially small away from the credit and the issuer itself Again, it shows that increasing transpar- and mid-sized investors for whom Section — but it shows at least the direction we ency on a step by step basis and in discus- 28 is made, because they have to rely on a are going in and even the CBIC initiative sions with investors — without a big bang legal framework. And it is very often those is probably not the end of the road. as suggested by the UK government or the investors from which you get the answer CBIC — is quite a promising way to do it. that they don’t necessarily need or want Homey: Transparency is one thing; the more information, but perhaps more con- other thing is supervision, and the strict Buschmann: We definitely need this sistent or comparable information, or more German supervision through BaFin and transparency, not only in the covered timely information. And so you really have through the cover pool monitor. This adds bond market, in the Pfandbrief market; a broad range of investors with different comfort, at least from my perspective. we need it in the whole banking industry. needs, and you have to answer all their But if you are looking at possible im- Just looking back at what happened in the needs, not only those of investors seeking provements, investors are very interested past, you realise that for years there have loan by loan information on the cover pool. in LTV distribution data, and also the been risks that were not adequately priced The CBIC is representing big international seasoning of the loans. It should be very in the market because of a lack of infor- investors, and they clearly have the tools straightforward to provide this informa- mation and a lack of transparency. What necessary to analyse this and they want to tion, and also the maturity of assets — investors are doing right now is asking for know it, but it is not necessarily the case for both the average by the time to maturity more information in order to be able to each and every investor. and the time to reset — and this also by build up confidence again, to regain the interest rate type — fixed or floating rate. trust that they have lost during the crisis. Burmeister: That is a strength of the cov- If you could shed a little bit more light on If one wants to re-establish functioning ered bond market: you have these highly that, I would be delighted. markets, one needs to regain this trust. sophisticated international investors and Therefore we need this transparency. then a second and third tier of investors. Diemer: The interpretation of these con- But there is a kind of free riding taking cepts needs to be the same for each and Day: The ECBC’s labelling initiative place on the investor side with smaller in- every issuer and there needs to be some — will it enter into investors’ decision- vestors saying that if the larger players are sort of quality management by the vdp making? subscribing to new issues and are fine with for German banks and the ECBC for Eu- Burmeister: No, because we will always the name, then they can take Eu1m, Eu2m, ropean issuers to ensure that the data is make up our own mind what is a covered Eu5m or whatever, too. They don’t want to collected in a similar way. With regard to bond and what is a covered bond we would Jan/Feb 2012 The Covered Bond Report 35
  • 7. THE PFANDBRIEF ROUNDTABLE 2012 a consequence the attractiveness of the product to a certain extent rests on regula- tory implications. In all the evolving regulatory frame- works — Basel, Solvency, bail-in, UCITS — we have a preferential treatment for covered bonds. And there are not many preferential treatments in these regulatory initiatives at all. It is clear to me that this will bring covered bonds under the scruti- ny of regulators over time, asking whether they still deserve preferential treatment, especially as in the next years the covered bond universe will very likely have wid- ened further still. Therefore it is one of the core interests of the industry, especially of the traditional covered bond industry, to work on such a differentiation, and to work on differentiation that bites. Day: Rumour has it that German struc- Diemer: “The interpretation of these concepts needs to tured covered bonds are on the horizon. be the same for each and every issuer” Would Helaba or Aareal consider struc- tured covered bonds to be of interest? like to be invested in. As far as I understand set classes. In such an environment a label Diemer: We offer established capital the label, it’s a UCITS definition of a covered that can ring-fence the traditional high markets products. These are Pfandbriefe, bond plus a certain transparency require- quality asset class can be of value. senior notes, deposits and our share. ment. It’s nice to have and if you follow that For this to be achieved, it is key that There is no intention to offer anything like route, it might be nice to introduce it, but such a label has teeth. Whenever you de- a structured covered bond. In our discus- that is not freeing us as investors from the fine criteria, there has to be a certain like- sions with investors, it’s extremely im- duty of really doing our credit work. lihood that there will be covered bonds portant for them that an issuer can dem- I don’t know if they have tried to establish that will not fulfil the criteria, otherwise onstrate that it can rely on a diversified a link to the ECB or something like that — a label is not really of much added value. refinancing base. The role played by de- there were ideas to do so. It does make a dif- That is the challenge in the European con- posits or the role played by our footprint ference if you say a covered bond is UCITS text, finding a definition that actually ful- in the Schuldschein market is an impor- compliant or not, it has implications for our fils this requirement. tant aspect for our investors. The current portfolios, whether it is CRD compliant or diversification we have on the liability side not. But the ECBC is not an official body. “And now they are is sufficient for our capital markets access. Homey: I very much agree. Perhaps it is perhaps trying to Gipp: For Helaba this product is not of an attempt to establish a new brand like establish a new any interest at all. Pfandbrief. Everyone knows what quality a Pfandbrief is, and now they are perhaps quality standard on a I think it is actually very much a function of what you want to substitute trying to establish a new quality standard European basis.” through any structured covered bond on a European basis. funding. I personally see it as a substitute This is important both for investors for senior unsecured funding, also from a Tolckmitt: In general, we welcome the and also from a regulatory perspective. pricing point of view, and not for covered idea of such a label, in such an environ- Only if you can make a convincing point bond funding. So it could potentially be a ment. First of all, post-crisis, a number to regulators that what you are defining valuable instrument for those banks that of jurisdictions are considering setting is really a high quality asset class will you do not have access to the senior unsecured up covered bond laws that might not be receive regulatory relief or preferential market, who have a very specialised busi- the same as the classic European ones, the treatment. And only if you have this kind ness model or who do not have alternative US in particular. And secondly, issuers of preferential treatment will the label be funding possibilities. But due in particu- of all kinds are interested in transferring widely accepted by issuers because in- lar to the three year ECB tender that was the idea of covered funding to other as- vestors are paying attention to it, and as announced in December and that will be 36 The Covered Bond Report Jan/Feb 2012
  • 8. THE PFANDBRIEF ROUNDTABLE 2012 carried out again in February, this need probably not have far reaching effects. It some large investors that cannot buy our for alternative senior unsecured funding may be a good thing going forward when quality product due to the fact that we just at attractive costs has more or less van- we are in calmer waters, but right now it offer Eu500m transactions. We work with ished, so I don’t think this instrument will doesn’t help us too much. those investors that are ready to invest in find very much interest. It comes down to the banks deleverag- Eu500m transactions. Another point which I see as extremely ing and reducing the size of their trading crucial with regard to the use of structured books, whether they are willing and able Buschmann: Fact is that investors are covered bonds is the tranching of balance to take positions. liquidity takers and they cannot do much sheets, which puts the senior unsecured about improving liquidity. It’s more up investor in a more and more subordinated “Covered bonds will to the market-makers to develop more position, and that is something that banks should be generally very, very careful in my view certainly sophisticated risk management tools and free up risk budgets again for their trad- with. Ultimately that could have negative not be the new ing books, then to apply these changes effects on the rating, and would then af- fect your entire product offering right up unsecured. That to and show a commitment to the covered bond product. Then liquidity would be to covered bonds. me is quite clear.” able to come back. Maybe not to the levels we have seen years ago, but it might come Tolckmitt: If you look at the current dif- Tolckmitt: It was never expected that back to levels that are reasonable for in- ficult funding situation, especially in the market liquidity would increase dramati- vestors willing to trade. unsecured sector, there is a certain logic cally the day we launched the initiative. in looking for other funding instruments We have been looking at how to in- Burmeister: It perhaps also comes back to perhaps based on the idea of covered crease transparency because from an the issuers choosing syndicate banks that are funding, particularly given their preferen- investor’s point of view — and maybe providers of secondary market liquidity. tial treatment. But it would be wrong to not the sophisticated investors, but the assume that any of this preferential treat- overall investor base — price transpar- Gipp: It is not only a matter of investors ment would extend to structured covered ency was one of the main areas where asking for liquidity and of issuers provid- bonds. None of it will. investors were critical of the Pfandbrief ing backstop liquidity. Indeed you have to Furthermore, to answer a question raised market during the crisis. They said that be comfortable with the syndicate you are in many discussions recently, covered bonds one of the differentiating aspects of the choosing, and also you have to be very com- will in my view certainly not be the new un- Pfandbrief market relative to other cov- fortable with the placement of your bonds. secured. That to me is quite clear. ered bond markets was that they could A strong trend that we have seen in the past From an issuer’s point of view, you always get in and out of positions in couple of years is placement with more or will always look at the cost of your overall this market, even in the worst of times, less buy and hold investors. Not buy and funding mix, and I am pretty convinced but they were not satisfied with price hold forever, but for a longer period of time that a heavy use of structured covered transparency at times. And given that than previously, so for those investors the bonds will have negative effects on unse- we know that the classic fixed bid/offer need for quick in-and-out trading is not as cured funding and that, as a consequence, spread market-making will not return, crucial as it was a couple of years ago. the overall funding costs will not neces- we thought about ways of increasing this The discussion about issue size is very sarily be lower than without them. transparency and that is where this ini- much a matter for investors and their tiative should help, by giving investors an general investment principles. Currently Day: The vdp in January started pub- indication of where the market is. the world is divided into more or less two lishing average spread data on Jumbos. factions, with a portion of investors being How might this make a difference to the Day: Tammo, your benchmark was able to buy Eu500m issues and others still secondary market? Eu500m and so was the previous one. needing Eu1bn issues as a minimum to in- Burmeister: I don’t want to discourage What is your view on the difference in vest. From an asset-liability management the vdp from continuing in that respect terms of how that affects the price you point of view it would be desirable to have — and besides transparency to work on get, what investors you get, and what more rather than less investors who can other things to increase the tradability of that might reflect in terms of liquidity? buy smaller sized issues. That would make the product — but frankly speaking when Diemer: In the last few years it has been ALM management for banks easier. iBoxx it comes down to investing it’s fair to say the issuer’s responsibility in particular has shown a little bit the way by now add- that issue size, geographic area, and un- to provide a certain backstop liquidity ing Eu500m issues into their benchmark, derlying assets are important — you can to the investor base and also to its mar- and if more and more investors follow see this reflected in where and how wide ket partners, the lead managers. As you these indices, maybe that will help to pave bid/offer spreads are — but in the current mentioned, we consistently issue Eu500m the way for smaller issues to be treated as market environment the vdp initiative will transactions, and you are right, there are being as liquid as Eu1bn issues. Jan/Feb 2012 The Covered Bond Report 37
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