Pfandbriefe have been subject to the ups and downs of the covered bond market as it finds its new post-CBPP3 normal amid evolving rate dynamics and CRE fears. In our latest annual roundtable — held in association with the vdp and host Crédit Agricole CIB in Paris on 23 April – participants share their insights and expectations regarding the German product.

1. The Covered
Bond Report
The Pfandbrief
Roundtable 2024
www.coveredbondreport.com May 2024

2. 2 The Covered Bond Report May 2024
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
Neil Day, The Covered Bond Report:
How has Pfandbrief issuance devel-
oped this year?
Sascha Kullig, vdp: We are quite happy
so far. As usual, we saw a quite strong Jan-
uary, it was a little calmer in February and
March, then after the Easter break we saw
benchmark issuance increase again. In the
benchmark segment, we are more or less
at the same level as this time last year, with
our member banks having issued €18bn in
benchmarks, as well as several sub-bench-
marks lately. Looking at overall Pfandbrief
supply including illiquid issues, we al-
ready reached €20bn by the end of March,
even higher than last year. A significant
part of benchmark issuance has been in
ESG format, mainly Green Pfandbriefe.
Indeed, about 20%-25% of benchmarks
are now typically issued in ESG format.
Florian Eichert, Crédit Agricole CIB:
The German supply ties in with a very
clear pattern for core European issuance
this year. Although things calmed down
a bit after January, it was an especially
strong start from core Europe and the
front-loading we typically see from such
issuers was even more pronounced than
usual, because there are certain prominent
political risks in the second half of the
year while central banks are also poised to
start their various cutting cycles. Some of
the non-Europeans have been less present
so far this year because they don’t seem
to need as much funding, have issued in
different currencies, or chosen senior pre-
ferred over covered bonds because spreads
between the two are relatively tight. After
having sat on the sidelines while the core
European wave went through in Q1, they
may go on to become a bit more promi-
nent, but the heavy front-loading from the
likes of Germany and France ultimately
means that H2 will be quieter overall.
Day, The CBR: The heavy supply
early this year had been anticipated,
although was better received than
expected. What were the dynamics
behind that?
Vincent Hoarau, Crédit Agricole CIB:
2023 was a very difficult year, a year of
transition where we collectively had to
digest the legacy of a decade of covered
bond purchase programmes and quantita-
tive easing. We then started 2024 with very
healthy valuation levels and relative value
schemes that made much more sense.
The widening trend we saw throughout
2023 stopped in January and since then
the direction has been one-way in terms
of spread — even if performance has not
been substantial.
The performance of the asset class
overall and of the Pfandbrief segment
within that has been driven by the combi-
nation of two elements, namely the carry
on offer and the liquidity situation. The
vast majority of new Pfandbrief issues
continue to offer coupon levels above 3%,
which is very appealing for investors tak-
ing into account the low volatility of the
asset class. We had some instances at the
beginning of the year — green issuance
from MünchenerHyp in 10 years or Ber-
lin Hyp in three years — where you could
sense the fear of missing out from inves-
tors, with books peaking well above the
€3bn mark, something we hadn’t seen for
quite some time. Meanwhile, the ongoing
recalibration of the rate market continues
to fuel this very positive dynamic and ce-
ment the attractiveness of the segment.
The asset class’s performance is also based
on the greater diversification in the make-
up of investors during bookbuilding.
Since the beginning of the year, we have
The Pfandbrief
Roundtable
2024
Pfandbriefe have been subject to the ups and downs of the covered bond market as it finds
its new post-CBPP3 normal amid evolving rate dynamics and CRE fears. In our latest annual
roundtable — held in association with the vdp and host Crédit Agricole CIB in Paris on 23
April – participants share their insights and expectations regarding the German product.

3. May 2024 The Covered Bond Report 3
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
seen many more credit buyers involved in
the asset class, including UK and Nordic
accounts, hence the granularity of order
books globally has increased significantly.
And some of the very big UK real money
investors have been buying into the asset
class — not necessarily Pfandbriefe, but
other jurisdictions — with orders the likes
of which I’ve never seen before — we’re
not even talking €100m, but sometimes
€200m, €300m.
The benefit of these two factors are
felt in the primary market but also in the
secondary market, where there have been
two-way flows since the beginning of the
year, which was not always the case last
year due to the ECB’s presence. This is all
taking place against a backdrop of strong
inflows into the overall credit market as
we continue to benefit from the excess
liquidity in the Eurosystem. Investors are
going all-in, buying covered bonds across
the board, whatever the jurisdiction,
and this is also benefiting the Pfandbrief
segment.
Looking at relative value across
jurisdictions and comparing Germany
with France, for example, the Pfandbrief
has have never been so attractive. The
differential between the two countries has
narrowed significantly since the middle
of last year. Take the LBBW and CFF
new issues last week: they both paid 70bp
over Bunds, while CFF was priced only
25bp above OATs. Classic rates investors
will tell you that Pfandbriefe are clearly
very cheap versus French covered bonds,
taking into account valuations versus
domestic sovereigns. So, everything
being equal, we can say that there is now
a new pricing paradigm across covered
bond jurisdictions — but also within the
German complex — which is driving
relative value elements in favour of the
Pfandbrief segment.
Day, The CBR: How do issuers’ ex-
periences chime with the trends de-
scribed thus far?
Franz-Josef Kaufmann, Commerz-
bank: Vincent’s description is pretty
accurate. In H2 2023 markets were a bit
more challenging. Longer tenors were
virtually closed for the entire second
half, with short and medium tenors very
crowded. We bore this in mind when we
Vincent Hoarau, head of FIG syndicate, Crédit
Agricole CIB
Sascha Kullig, member of the management board,
Association of German Pfandbrief Banks (vdp)
Martin Gipp, head of funding, Helaba
Julien de Saussure, senior credit portfolio
manager, Edmond de Rothschild Asset
Management (EDRAM)
Florian Eichert, head of SSA/covered bond
research, Crédit Agricole CIB
Neil Day, managing editor, The Covered Bond Report
Alberto Pisana, fixed income senior portfolio manager,
AllianzGI
Laure Donsimoni, credit portfolio manager, Amundi
Franz-Josef Kaufmann, managing director, liquidity and
funding, group treasury, Commerzbank
Götz Michl, head of funding and debt investor relations,
Deutsche Pfandbriefbank AG (pbb)
Stéphane Taillepied, financial analyst, Amundi
Participants in the roundtable, which was held in Paris on 23 April (left to right):

4. 4 The Covered Bond Report May 2024
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
looked at the market in January, when
we typically try to launch our first trans-
action very early, very often in Pfand-
briefe, and on the second working day of
the year we issued a dual-tranche trade,
three and seven year Pfandbriefe. They
were pretty well received: we had an or-
der book of over €3bn for both tranches,
almost equally split, allowing us to print
€1bn per tranche, and the new issue con-
cession at the time was 9bp, with the deal
performing strongly. Markets were able to
absorb the heavy supply at the beginning
of the year well and almost everything
performed. We then issued our second
Pfandbrief in March, a 10 year Pfandbrief,
at the same spread at which the seven year
had been priced in January. The book was
over €2.2bn, with a broad range of inves-
tors participating, and that bond also per-
formed well. So it looks like the market is
indeed in a pretty solid position for Pfand-
briefe. But, yes, we should keep in mind
that Pfandbrief spreads in the 30s — 38bp
for 10 years — are pretty elevated com-
pared to previous years. Relative to SSAs,
I can imagine that for investors a Pfand-
brief could be a very attractive, let’s say,
risk-free alternative.
Martin Gipp, Helaba: Covered bond
markets were indeed challenging last year.
Everything was focused on shorter and in-
termediate maturities, while long maturi-
ties were not tested — although I’m not
really sure if they wouldn’t have worked
earlier. We as Helaba relied more on in-
termediate funding, too, which served our
balance sheet fine, because the average
duration on the asset side is also in the in-
termediate part of the curve.
The situation has changed this year.
However, we do not look at issuance
purely from an instrument perspective,
but more from an overall liquidity per-
spective — we look at what is the most
valuable market at the time we are look-
ing at funding — and that is why this
year we first went out with a senior non-
preferred benchmark issue. It offered the
best relative value at that time actually,
especially at the shorter end of the curve,
because there you didn’t have to pay any
premium, and you were actually awarded
the basis between three month and six
month Euribor in the floating rate mar-
ket. Thereafter, we saw the longer end
open up nicely in the Pfandbrief sec-
tor. We therefore followed up with a 10
year Pfandbrief benchmark and we were
quite surprised by the overwhelming de-
mand. The book was the largest we have
received for a 10 year and we were able
to print our largest ever 10 year Pfand-
brief, a €1.25bn deal. That more or less
kickstarted the trend for longer tenor
issuance. So now it’s a good thing that
the entire market is open for funding ac-
tivities — also thanks to the disappear-
ance of CBPP3: you have new investors
coming in and new pricing dynamics.
Yes, issuing Pfandbrief currently is more
costly than before, but if you have proper
transfer pricing, it doesn’t harm your as-
set side. So overall the market has been
very receptive and I believe it will remain
so for the product.
Day, The CBR: Moving to the investor
side, what were your expectations
vis-à-vis covered bonds and Pfand-
briefe at the beginning of the year,
and how do market developments
compare?
Laure Donsimoni, Amundi: We were
pleased to see new issues coming out at
the start of the year, because we had been
looking into covered bonds. Indices were
mainly composed of issuance that had
been bought by the ECB so they were
not really reflecting the market. They
were illiquid, and they were not showing
any performance. We needed liquidity to
come back in order to bring this asset class
back to life and give it a new dynamic. So
we were happy to go with the flow and
participate in the first issues in January,
which, as mentioned, was initially in the
three to seven year maturities. We had
been a little bit cautious on longer maturi-
ties at the start of the year, but the market
proved to be pretty solid, and we saw is-
suance performing on the secondary mar-
ket, which was reassuring. We stepped
into the 10 year maturities and we were
not disappointed.
Alberto Pisana, AllianzGI: Things have
been quite positive, overall. I dare say the
market has developed in line with our ex-
pectations in terms of volumes and also
performance. We were expecting the year
to be kind of split in two, with a final leg
of the widening that started in 2022 con-
tinuing for few months, and then a more
benign performance. I think we are near
or maybe have passed the peak in spreads
now. There has been a lot of demand in
the primary market and we were expect-
ing this for the reasons cited by Vincent
on the valuation levels.
Eichert, Crédit Agricole CIB: The way
investors have been looking at covered
bonds relative to other asset classes has
in general been very positive for the mar-
ket this year. At the same time, there are
underlying dynamics that are not wholly
positive.
Alberto talked about us being past the
peak; I would say that in some jurisdic-
tions we are basically already at the bot-
tom again, with there being little room to
tighten further versus swaps. We have the
French, the Dutch, the Norwegians and
some of the Finns all more or less around
mid-swaps plus 20bp in five years. That’s
clearly positive for the Germans, but I
come across a lot of investors who are now
‘We are near or
maybe have passed
the peak in spreads’
Laure Donsimoni, Amundi:
‘We stepped into the 10 year
maturities and we were not
disappointed’

5. May 2024 The Covered Bond Report 5
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
looking at the state of play and asking,
how do we position ourselves now? Plus
you have less bank treasury buying, from
both German and to some extent French
banks, because they have already bought
a lot since 2022. So while you may have
more diversification in the buyer base and
some beneficial shifts in relative value, real
money are also looking in absolute spread
terms and a few of them are now scratch-
ing their heads. You need to have a bit of a
shift in mindset from thinking something
looks good in relative terms and offers
10bp-15bp of tightening potential, to say-
ing, let’s just buy covered because there’s
a bit more negativity in the market and
they’ll widen less than alternatives. So it’s
good that supply has slowed down a little
bit, because I’m not sure we would have
still had the same type of support for the
pace we saw in January at today’s spread
levels. I’m not saying this is all doom and
gloom; quite the opposite. But to say eve-
rything is in tip-top shape would be a bit
much, too.
Pisana, AllianzGI: Another point that
I would highlight — linked to the end of
CBPP3 and other central bank interven-
tions — is that there is more discrimina-
tion — and rightly so — not only across
jurisdictions, but also across issuers. Vin-
cent mentioned that parts of the Pfand-
brief market look fairly valued or even
attractive, but we don’t see value only in
German covered bonds. We screen the
cover pools, the individual issuers, and
have had this analysis in place for a long
time, and we are happy to see that this dis-
crimination is now offering added value.
Stéphane Taillepied, Amundi: Over
the last 10 years Germany accounted for
around 20% of all covered bond issuance
on average. The new focus for investors
is the commercial real estate exposure of
German Pfandbriefe. On average, CRE ex-
posure is around 40% for Germany, 35%
for Austria, and below 5% for France and
others. Looking at US CRE exposure, it’s
around 20% for each of Aareal, pbb and
Helaba, but there has been a very strong
differentiation among investors, with
Helaba, for instance, performing very
well, probably linked to the fact that the
overcollateralisation is very strong, the
strongest in Germany. I think investors
are spending more time dipping into
the cover pool reports, which was not so
much the case before, and I expect there
to be more discrimination from inves-
tors going forward — it’s important to see
this. Meanwhile, the recovery of both pbb
and Aareal Bank in recent weeks has been
quite reassuring.
Julien de Saussure, EDRAM: We look
at financial institutions issuance across
the capital stack and when we have been
looking at the increased risk perception
around CRE exposure within German
banks, we couldn’t reconcile the level of
stress expressed in some of the valua-
tions of instruments in the capital stack,
especially subordinated bonds, and the
relatively smooth widening in the covered
bond market. Ultimately, I find that the
covered bond market — which, as previ-
ously mentioned, is more liquid now —
probably offers a better representation of
the underlying stresses than that implied
by the subordinated instruments, which
are not particularly liquid. Digging fur-
ther into the dynamics of covered bonds
has helped us better understand what was
happening for the rest of the capital struc-
ture, and while there is stress, it is nothing
like as strong as what could be seen in the
price movements of some of the subordi-
nated bonds.
Kullig, vdp: In some cases there are hard-
ly any differences in the spreads of Pfand-
briefe and other covered bonds. Do you
think that means they are at an attractive
level, with Pfandbriefe performing better
again in the future? Or do you think this
is going to be the new normal? If so, why?
Because of the different cover assets, CRE
exposure, covered bond harmonisation?
Pisana, AllianzGI: They are now rela-
tively more attractive, but I wouldn’t go as
far as to say that they look very compelling
and that it is a sector where we’re going to
jump in. As I said before, the spreads on
Pfandbriefe are just reflecting the risks of
the cover pools, which are different from
other jurisdictions. Even though we ac-
knowledge all the covenants embedded
in the German regulation, which are bet-
ter than many others in most respects, we
also look at the different growth dynamics
of Germany compared to other European
countries, at the composition of the cover
pools. I’m not sure that if there is a fur-
ther rally in spreads, Germany will be the
country that will benefit the most. Apart
from the fact that a further rally is maybe
unlikely, we have seen strong demand
for those jurisdictions trading at wider
spreads — demand is there because inves-
tors are now taking the time to analyse the
fundamentals of the issuers across juris-
dictions and pick the best values — and
those are perhaps the better candidates to
benefit from a rally, if we see one. But yes,
I wouldn’t go as far as saying that there is
potential for massive tightening from cur-
rent levels in Germany.
Hoarau, Crédit Agricole CIB: It is clear
from the market that German Pfandbriefe
are no longer the tightest covered bonds
out there. Take the Nordea 10 year and
LBBW long seven year from last week:
on a curve-adjusted basis, Nordea came
tighter than one of the tightest Pfand-
briefe. I agree that the new normal is a
Florian Eichert, Crédit Agricole CIB:
‘Real money are also looking in
absolute spread terms and a few of
them are now scratching their heads’
‘The new focus for
investors is the CRE
exposure’

6. 6 The Covered Bond Report May 2024
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
return to fundamentals and that this is
a very healthy situation, something we
didn’t have for the past 12 years because of
the Eurosystem.
One factor that could play in favour
of Pfandbriefe is size. The German is-
suer base is quite granular: we have had
31 Pfandbrief benchmarks this year and
the average size was €600m, which is rela-
tively low compared to what you see from
France and, of course, Canada. Given how
close German Pfandbriefe are trading to
French covered bonds, there is a lot of
value in terms of diversification for inves-
tors, particularly French investors who
are ready to buy French covered bonds
very close to OATs and are happy to buy
low single-A or triple-B corporates in the
50bp-plus area. And if you look at Com-
merzbank senior today at the 50bp-plus
area on five years, their Pfandbriefe in the
mid-20s offer relative value given the 25bp
difference for the rating differential. So
yes, back to fundamentals and you need to
do more due diligence on cover pools than
in the past, but there are definitely some
parts of the Pfandbrief segment that offer
a lot of value versus other jurisdictions —
we all know that volume and frequency
of new issuance can drive spreads in one
direction or the other.
Kaufmann, Commerzbank: In January
2022, we issued a €1bn 10 year Pfandbrief
at mid-swaps minus 1bp; in March this
year, we issued a €1bn 10 year at mid-
swaps plus 38bp. OK, the first came post-
Covid after a period when we saw the
TLTROs and not much issuance. But we
have seen a significant widening of spreads
and I think Pfandbriefe are currently at a
very attractive level. I expect that there is
the potential for spreads to tighten, espe-
cially when you see a change in issuance
behaviour and supply falling, when what
has been issued is digested and we are in a
more normal situation, with positive rates
and attractive coupons. Of course, inves-
tors do their homework to understand the
underlying assets and to get a better feel-
ing for the legislation, but I think the levels
are attractive and wouldn’t be surprised to
see some more performance over the next
couple of quarters.
Eichert, Crédit Agricole CIB: Back in
the days you had KfW trade well through
swaps in 10 years; now you’ve got 10 year
KfW at plus 13bp, plus 14bp. Markets have
changed, and there are other asset classes
that are also stuck well above swaps. In
other words, it’s not like Pfandbriefe can
go back to swaps flat in 10 years anytime
soon. However, it’s not a situation issu-
ers can’t navigate. They have all the tools
at their disposal to make sure that trans-
actions work well. For example, DZ Hyp
chose a longer maturity for their late April
transaction than HVB the week before,
and it’s evident from those transactions
that at these levels, rather than going
shorter, going longer and opening books
at wider levels allows you to get a bigger
order book. So that’s one way of de-risking
a transaction. And with the head-scratch-
ing going on at the moment, the chances
of accidents have gone up a little again,
even if the overall backdrop is positive.
Day, The CBR: Relative value versus
other covered bond jurisdictions and
SSAs is one thing, but what about
the comparison with credit products?
The compression on the senior side
has been substantial. Is the senior
side now tight? Or are covered
bonds wide?
De Saussure, EDRAM: We’ve been quite
constructive on the spreads of financials
for a while. However, there came a point
when the progressive widening of covered
bonds called this tightening view into
question. If there are specific technical
dynamics pushing the spreads of covered
bonds wider, is it realistic to expect com-
pression dynamics in the capital stack? A
key issue was the extent to which banks
would opt for senior preferred or covered
bonds after the TLTROs, so we’ve been
monitoring how that has been developing.
Donsimoni, Amundi: Covered bonds
clearly widened and that contributed to
the compression between the two.
I would note that I’m not adding cov-
ered bonds to my credit funds in order to
get carry, because I have more carry on
other parts of the capital structure. I do so
on the LCR funds I manage, as it improves
my HQLA ratio.
But I want to take advantage of the
tightening potential, because I know that
performance will be good afterwards on
the secondary market. This is mostly a
triple-A asset class and with the widening
of spreads that we saw, at a certain point a
couple of months ago it was a no-brainer.
I would also highlight the new inves-
tors that we have seen coming into order
books. We had, of course, a lot of bank
treasuries, but have since seen other types
of investors putting in significant orders.
On our side, we see end clients interested
in the asset class, looking at it more close-
ly, and maybe stepping in.
So we have had a substantial tighten-
ing, but I don’t think it’s over. Maybe we
won’t see such a significant tightening
again, but the diversification of the inves-
tor base will help the asst class stay strong.
Day, The CBR: Götz, commercial real
estate and pbb have already been
mentioned a couple of times, so per-
haps you can deal with some of the
relevant points. Firstly, ahead of the
peak in concern around the impact of
CRE exposures, what has been your
Franz-Josef Kaufmann,
Commerzbank: ‘The levels are
attractive and I wouldn’t be surprised
to see some more performance’
‘One factor that could
play in favour of
Pfandbriefe is size’

7. May 2024 The Covered Bond Report 7
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
strategy regarding issuance, notably
your activity around year-end?
Götz Michl, pbb: Already a year ago, in-
vestors were focusing on commercial real
estate. They were also aware that we are a
specialist lender for CRE, sitting between
the universal banks with their diversified
business model and mainly large residen-
tial mortgages on the one hand, and the
Landesbanks with their ownership back-
ground on the other. What we had discov-
ered was a clearing level for the risk last
December and January, when we issued
dollar and euro Pfandbrief benchmarks
with three year maturities. The transac-
tions were well received by investors and
performed in the secondary market. Both
the dollar and the euro Pfandbriefe were
placed substantially outside Germany
with new investors. More than a third of
the euro-denominated Pfandbrief went
to Scandinavian investors. This interest
continued afterwards with the issuance
of Pfandbriefe in Swedish kronor — the
SEK3.05bn (€270m) size made pbb the
largest non-Scandinavian Swedish krona
issuer!
So we had found new equilibrium
levels that actually work for our business
model, since the margins on our loans
have also increased.
Moreover, the loans on our asset side
have become shorter, so we need pre-
cisely this three year funding. Most of
the covered bond market finances resi-
dential mortgages, which have a substan-
tially longer term than our commercial
mortgages. Consequently, the respective
bonds are now using the longer end of
the curve and the three year bucket faces
less supply.
Day, The CBR: What is your response
to the headlines and blow-out in
your spreads that followed?
Michl, pbb: Negative headlines on
banks active in the US real estate mar-
ket triggered investors to look for banks
with similar exposures and they rather
quickly identified us as a bank with high
concentration in commercial real estate.
The spreads for our Pfandbriefe moved
out quite massively, to 80bp, 90bp. There
was quite active trading, with new inves-
tors coming in at these elevated levels. We
are now back into the 50s, within three
months — that is quite some volatility for
the covered bond market.
Our reaction to the situation in Febru-
ary focused on transparency and investor
communication. We confirmed the guid-
ance for 2023, which we had given with
our Q3/23 results, and made a clear state-
ment on our liquidity position.
Donsimoni, Amundi: The market is
really nervous, so while there can be
this strong tightening, it can also widen
strongly and rapidly when there is bad
news. We’ve seen that in recent cases,
such as Covid, Trump or the US banks.
But then ultimately Stéphane will give us
his view on the bank and whether we can
jump in.
Pisana, AllianzGI: At the end of the day,
you remain a bank, and we have seen as
recently as last year banks going into de-
fault not just because of credit risk, but
because of liquidity issues. There could be
a run on the bank and that’s the worst risk
a bank can face. So I agree that all the cov-
enants of the Pfandbrief and also the over-
collateralisation you mentioned are quite
protective, but things can go down quickly
if there are concerns on the investor side
and a run on the bank. I appreciated the
news you put out at the beginning of the
year on the funding side, on the term de-
posits you have. But my understanding
is that this is still not a done deal; in the
coming quarters you will need funding
again and that will be another test. And,
of course, all the forthcoming numbers
you release will be closely watched from
our side.
Michl, pbb: You raise an interesting
point. When we had investor calls in early
February, the first three or four days, eve-
rybody was asking about our US expo-
sure, what kind of loans we have, which
sponsors, loan-to-value ratios, etc. Then it
flipped rather quickly. Nobody was inter-
ested in the US exposure; they all had in
mind Silicon Valley Bank and short term
deposits. The question was, how much li-
quidity do you have?
Being a specialist bank for real estate,
we don’t have overnight corporate depos-
its. There is no client relationship with the
typical German SME.
Taillepied, Amundi: The most reassur-
ing aspect is the very low loan to value
in your cover pool, which is the stronger
protection for investors.
De Saussure, EDRAM: I think it will
take time for the commercial real estate
noise to dissipate. We’ve moved from
a situation where people were worried
about US commercial real estate expo-
Alberto Pisana, AllianzGI: ‘We have
seen as recently as last year banks
going into default not just because
of credit risk, but liquidity issues’
Stéphane Taillepied, Amundi:
‘The most reassuring aspect is the
very low loan to value in pbb’s cover
pool’

8. 8 The Covered Bond Report May 2024
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
sure, especially offices, to broader com-
mercial real estate concerns. The negative
noise on Signa has also been a wake-up
call about the prospects of a broader
German commercial real estate crisis.
That’s why the pecking order in terms of
exposure within German banks has also
changed, because the ranking is different
depending on whether you focus only
on US commercial real estate or broader
commercial real estate. My gut feeling
is that it will take time for the market
to realise that the final losses are prob-
ably going to be way lower than what
was assumed by the market during this
crisis. And that is what it will require for
spreads to compress — even if there are
technical aspects in play.
Kullig, vdp: At least with regard to
Pfandbriefe, I am confident there won’t be
any losses.
De Saussure, EDRAM: That’s another
interesting point. When you analyse a
covered bond, you analyse the cover pool.
The problem is that it’s the same story as
what we had with cédulas in Spain: the
assets that are triggering the losses at the
bank level are also the ones that are in the
cover pool, so there’s a very strong corre-
lation between the default probability at
the bank and the loss given default. That
notion of correlation is very difficult to
assess — you can’t just assess the cover
pool. There was a time when pbb AT1s
were trading at a level implying it was
close to a negative event. Admittedly, the
market was probably misunderstanding
the bank’s liquidity structure, and a lot
of hedge funds were shorting the stock,
probably trying to set something in mo-
tion. But if we assume that BaFin were to
trigger a resolution for the bank, I’m not
exactly sure what happens to the cover
pool, even though I’ve asked this question
many times. In liquidation, I know who
owns the overcollateral, but in resolu-
tion, I’m not sure what happens to it. Does
that go with the cover pool and therefore
you have a negative loss on the estate and
there’s no recovery for seniors? Or does
that go only with a minimum legal over-
collateralisation? And in that case, what
happens to the covered bond? I acknowl-
edge that it’s quite hypothetical.
Kullig, vdp: When it comes to resolu-
tion, nobody really knows how it will ul-
timately work. Maybe it’s going to be as
has just been described. Maybe the SRB
or the national resolution authority is go-
ing to decide to use a bridge bank, which
is an alternative. Nevertheless, in each
case, the outstanding covered bonds and
the underlying assets, i.e. the cover pool,
will always stay together. So, most likely, if
the cover pool and the outstanding liabili-
ties are transferred to a bridge bank, for
instance, it will be the total including the
OC. When it comes to valuation, indeed,
there is a very minor risk that even in the
cover pool the values are so low that you
don’t have sufficient cover anymore. But,
firstly, it’s highly unlikely. And secondly,
if this is the decision, you would lose the
last conduit of the bank and the new bank
into the market to access liquidity. The
SRB and national resolution authorities
know that and so it’s extremely unlikely
that they would go down that path, be-
cause they would destroy the healthy part
of the bank. So, I’m convinced that won’t
happen.
De Saussure, EDRAM: We have indeed
concluded that the market is fundamen-
tally wrong: the compression between
senior non-preferred and Pfandbrief
doesn’t make sense given the very strong
benefit of the overcollateralisation.
Day, The CBR: Martin, Helaba’s ex-
posure and the performance of its
Pfandbriefe have been mentioned —
what’s your take on things?
Gipp, Helaba: CRE is a problem. The
same problems he’s facing, we as well as
other banks with CRE exposure are fac-
ing. We have taken precautionary meas-
ures against it: we have accounted for high
LLPs and we have taken into account post
model adjustments in our end of 2023 re-
sults. We are still of the opinion that it’s a
cyclical development that we are seeing in
the CRE sector, although the interest rate
movement has been much more severe
than anybody expected, so this down-
turn is much deeper than expected. We
might have probably seen the worst of it
but much depends on the development
of interest rates going forward, where we
might now be seeing some question marks
coming to the fore again. Overall, we ex-
pect the CRE markets to remain fragile,
definitely for this entire year, maybe even
lasting into next year. Our internal as-
sumption is, that a cycle usually takes at
least two years, and we are not through
that yet. So we expect CRE-related LLPs
to remain elevated and above average
this year, but probably not as high as they
have been this year. We are pretty confi-
dent that, especially with the post model
adjustments we have taken, we have taken
sufficient precautionary measures.
And what is really positive about Hela-
ba is that we are a universal bank, we are
not a monoliner. We therefore have a di-
versified business model with the capabili-
ty to substitute certain areas of concern by
other very profitable business segments.
We also have the background of the
savings banks. We are able to raise liquid-
ity in senior format — which is actually
much more important for us as an institu-
tion than the covered bond format — at
very attractive levels through the savings
banks franchise, and that is helpful. So
Julien de Saussure, EDRAM:
‘The compression between senior
non-preferred and Pfandbrief
doesn’t make sense’
‘In resolution,
I’m not sure what
happens’

9. May 2024 The Covered Bond Report 9
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
overall we are in a pretty good position. I
would like to reiterate that the Pfandbrief
is not the most important refinancing tool
for us; as a universal bank we primarily
have senior and, to a lesser extend, MREL
demand. The residual funding is covered
by Pfandbrief issuance.
Regarding cover pools, they are not
the problem with regards to CRE. CRE
is a credit issue and you usually will not
see CRE problems materialise in the cover
pools, but rather it’s in the other parts of
the institution that they lie.
Day, The CBR: While US exposure
has hogged the headlines, there
have been concerns about real es-
tate more generally. How is the Ger-
man market developing?
Kullig, vdp: As Martin described, we had
an extraordinary upswing, and it was to be
expected that this cycle would come to an
end. It was a little abrupt, and that natural-
ly has a severe impact on both prices and
transaction volumes. For instance, our
member institutions reduced their resi-
dential mortgage lending by 35% last year.
It was a little less pronounced in commer-
cial real estate lending, where the decline
in transaction volumes was around 25%.
The price declines were, of course,
much more pronounced in the CRE mar-
ket, at minus 12% year-on-year, and down
16.5% from their peak. Office is the asset
class in focus and the decline there was
even higher than in the retail sector that
has faced problems earlier already. Look-
ing ahead, we actually expect that we
might have reached the bottom already in
residential property. In residential lend-
ing, transaction volumes have picked up
again. There is a huge lack of housing in
Germany, so we expect that not only will
transaction volumes rise, but also that
prices may have reached a bottom or that
we might reach it soon, even if we don’t
expect any huge price increases this year.
We are not that confident when it comes
to offices. We have not yet reached any
new equilibrium, so we expect further
price declines.
Day, The CBR: Götz, the potential
for pbb to be tested further when
it comes to funding was mentioned
earlier. What can you tell us about
your potential issuance going
forward?
Michl, pbb: On top of what we have al-
ready issued, we will probably do one or
two Pfandbrief benchmarks this year for
a total of around €1bn. Again, we will tar-
get the three to four year part of the curve,
depending on what maturity buckets are
available.
We have discussed headline risk, and
for us the investor sentiment towards
commercial real estate in general is very
important.
We will not go into the market with a
senior preferred benchmark this year, since
we use other sources like our retail term
deposits under the brand name pbb direkt.
Day, The CBR: Franz-Josef and Mar-
tin, what are you anticipating for the
rest of the year?
Kaufmann, Commerzbank: We have
been fairly active so far, issuing three
Pfandbrief benchmarks for €3bn and
some private placements on top of that, so
we are pretty advanced in our Pfandbrief
issuance. We have issued non-preferred
senior and Tier 2 in benchmark format
very successfully, so have also taken pretty
big steps towards covering our regulatory
needs when it comes to MREL and capital.
Our intention was to make significant
progress in our funding plan at the very
beginning of the year, because we believe
that there is the potential for some vola-
tility. When you look into the geopoliti-
cal front and upcoming elections, there’s
significant potential for noise. Markets
have been extremely positive, but looking
into the past, we have sufficient evidence
that whenever the sun is shining and eve-
rything is working well, something can
come along and derail the situation, and
I wouldn’t be too surprised if that were to
happen again this year.
We still have some issuance on our
agenda. It also depends on the develop-
ment of our businesses, which could cause
us to adjust our funding plan. But as of
now, we feel very solidly positioned.
Gipp, Helaba: Our issuance is derived
from the projected new asset business as
we follow a matched funding approach.
Due to the stage of the cycle we’re at and
the recessionary scenario, that new asset
business is projected to be lower on aver-
age this year, around €11.5bn, which we
need to refinance. We have done close to
€5bn of medium to long term funding of
that already this year, so we are well ahead
of budget already in 2024.
As I said, we primarily rely on senior
funding, especially out of our franchise.
We have done the majority of our MREL
funding already via the benchmark issue
Götz Michl, pbb:
‘We will probably do one or two
further Pfandbrief benchmarks this
year’
Sascha Kullig, vdp:
‘In residential lending, transaction
volumes have picked up
again’

10. 10 The Covered Bond Report May 2024
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
and via the proceeds we receive from our
franchise, so there’s no room for another
benchmark. Capital-wise, we have only
limited needs — we are just refinanc-
ing regulatory amortisations in the Tier
2 space in order to keep the Tier 2 layer
more or less constant. So for the remain-
der of the year, there would be potentially
room for another Pfandbrief benchmark,
but that is not yet decided. Maturity-wise,
an intermediate maturity, maybe a little
bit longer than five years, usually fits our
balance sheet.
Day, The CBR: Vincent, how do you
see the market developing over the
rest of the year?
Hoarau, Crédit Agricole CIB: First of
all, globally, we are in a very healthy situ-
ation in terms of the covered bond asset
class. Whatever happens in terms of geo-
politics, macro events or whatever, the
asset class will continue to remain com-
pletely immune from any type of volatility
we may see, which indeed will probably
at some point affect the lower parts of the
capital structure. As long as rates remain
where they are, give or take 50bp and dis-
counting the ECB cutting rates at some
point, if the liquidity situation in the sys-
tem remains the way it is at the moment
— i.e. very favourable — for me, covered
bonds are going to remain extremely stable
— which is the charm of this asset class.
As we discussed, I’m not sure that
we are going to see a very strong spread
performance from where we are now.
We need to bear in mind that there is a
lot coming up out of the SSA world. Eu-
ropean defence spending will become an
increasingly prominent topic, with more
and more countries having to fund bal-
looning budget deficits, and this — rather
than geopolitical or macro events — is
potentially what will pose the challenge
for covered bonds in terms of valuations.
But again, a slowdown in supply and is-
sue sizes in the context of €500m-plus
for the Pfandbrief segment should prove
supportive. With regards to overall euro
benchmark covered bond volumes for the
year, I think we can still feel very comfort-
able with Florian’s expectation in the con-
text of €160bn.
Day, The CBR: Sascha, we have seen
two savings banks — Dortmund and
Bremen — debut with sub-bench-
marks this year. What is the signifi-
cance of these?
Kullig, vdp: In recent years more and
more German banks have been entering
the Pfandbrief market, for several reasons.
The most important is that they saw the
Pfandbrief offers market access at more or
less any time. Even though savings banks
and German cooperative banks are espe-
cially rich in deposits, they see the Pfand-
brief as an additional funding instrument.
They probably won’t use it on a day-to-day
basis, because of their huge deposit bases,
but we do expect that there will be plenty
of interest from further German banks to
enter the Pfandbrief market — or firstly to
apply for a licence, which can take a year
or two because the requirements are really
strict in Germany, especially with regard
to risk management.
So we do expect more Pfandbrief
banks to come to the market and several
of them try to tap the sub-benchmark seg-
ment, but it’s probably not going to be a
huge development with many new bench-
mark or sub-benchmark issuers.
Day, The CBR: What are your hopes
and expectations for the review of
the covered bond directive and re-
lated EBA work, such as maturity
structures and ESNs?
Kullig, vdp: My understanding is that a
few topics will be heavily discussed, one
of them being maturity extensions, and
that they will focus very much on national
discretions. The EBA held a roundtable
two weeks ago and the national and super-
visory authorities asked a lot of questions
about maturity extensions. It seems there
is room for improvement in their knowl-
edge — many of them have a securitisation
background, which is a bit worrying. Our
wish is that they keep the principles-based
approach of the directive. The markets and
covered bond models in the different coun-
tries — take Germany and France, for ex-
ample — are completely different. We also
don’t want to see the same mistakes that
have been made in the securitisation mar-
ket. We all know the securitisation market
doesn’t work very well, even though it is
highly regulated with big transparency and
disclosure requirements, and indeed may-
be that’s actually one reason why it doesn’t
work that well. And please don’t mix secu-
ritisation with covered bonds — they are
different asset classes.
Eichert, Crédit Agricole CIB: It’s typi-
cally the case with regulators and super-
visors that there are a limited number of
people with the right kind of experience,
plus there is often a lot of turnover. Hence,

11. May 2024 The Covered Bond Report 11
IN ASSOCIATION WITH THE VDP & CRÉDIT AGRICOLE CIB
discussions are often an uphill battle. But
we’ve been there, done that, and done al-
right over the past decades, so I’m reason-
ably hopeful — not on the workload, but
on the outcome.
Day, The CBR: Franz-Josef, you were
involved in a proto-ESN, Commerz-
bank’s SME structured SME covered
bond. What is your view today?
Kaufmann, Commerzbank: The cov-
ered bond format as it is works — it is
used by issuers and accepted by investors.
There are different legislations and differ-
ent formats that have an impact on exactly
how it works, but at the end of the day
it is a solid financing instrument, and I
hope that is taken into account during the
discussions.
Yes, 11 years ago we decided to use the
concept of covered bonds for different as-
sets that we had, and still have, on the bal-
ance sheet, namely very high quality SME
loans, and we structured this in a way that
has been accepted by the market. For a va-
riety of reasons we have issued only one
such covered bond, but it was proof that the
concept works. So taking these techniques
and extending them to other assets via
ESNs could be an interesting opportunity.
It needs to be done correctly, but I do not
see any risk of it jeopardising the existing
legislation for covered bonds — the market
is sufficiently educated to differentiate be-
tween different instruments and to find the
right price and the right pockets for them.
And providing banks with an alternative
means of getting funding structured and
successfully placed into the market should
by definition be a good thing.
Day, The CBR: The EBA is also look-
ing into green covered bonds. What
might be expected to come out of
that?
Kullig, vdp: Our expectation is that they
will focus very much on ESG risk and rec-
ommend more disclosure requirements,
not for green or social covered bonds only,
but for the entire cover pool and outstand-
ing covered bonds. For instance, EPC levels
or CO2 emissions — which can already be
disclosed in the Covered Bond Label HTTs
(harmonised transparency templates).
Day, The CBR: Alberto, how do you
look at these issues?
Pisana, AllianzGI: We look at issuers
holistically, at the whole balance sheet and
their ESG activities. I do not really attach
a value to a green label on an individual
bond, especially for covered bonds where
we are financing the whole cover pool and
not only a specific project or collection
of projects. So we are happy to see green
bonds if it means that the bank is engaging
in green activities, and is not just for mar-
keting. And clearly we are not happy to
pay a greenium simply for the label itself.
Gipp, Helaba: I agree that the holistic
approach of an institution is what increas-
ingly counts. The product itself has its
value, but as you say, you are not willing
to accept a greenium, and for us, if you
do not have an economic advantage, why
should you add extra complexity and re-
sources? And therefore I think the holistic
approach on an institution’s basis will be
the future — even overall ESG ratings at
the end of the day.
Hoarau, Crédit Agricole CIB: It is in-
deed increasingly evident in the primary
market that more and more investors are
looking at issuer ESG scoring, not neces-
sarily whether the specific transaction is
green or not. So we have often seen inves-
tors passing on an issuer in unsecured for-
mat because they had a poor ESG score.
Nevertheless, whether we are talking
secured or unsecured, the level of granu-
larity in the order book for green issu-
ance picks up significantly, and at the end
of the day, the bigger and more granular
the book, the greater the price tension.
So there is definitely a favourable impact
on pricing for the issuer, even if it’s very
difficult to quantify. You will tend to ex-
tract the most value of the ESG feature on
an investment grade Tier 2 rather than a
covered bond, but a positive pricing dy-
namic can still be extracted in the covered
bond space. We saw this, for example, on
the green MünchenerHyp and Berlin Hyp
deals I mentioned at the start.
Donsimoni, Amundi: There are two as-
pects to it. You need to screen the issuer,
but also certain green bond funds require
a bond to be green to be eligible — more
on the corporate bond fund side. But as
Alberto said, we don’t accept a greeni-
um and look at pricing in the same way
whether or not a bond is green. I agree
that we saw greeniums a lot before, but
they are less of a thing today because in-
vestors have pushed back against this. n
Cover image: Assemblée nationale with
sculptures representing Olympism, Paris,
April 2024; Credit: Petr Kovalenkov/Alamy
Vincent Hoarau, Crédit Agricole
CIB: ‘You will tend to extract the
most value of the ESG feature on an
IG T2 rather than a covered bond’
Martin Gipp, Helaba:
‘I think the holistic approach on an
institution’s basis will be
the future’

12. Quality by tradition
In volatile times the Pfandbrief is an especially reliable
investment. Its first-class credit quality and stable returns on
investment are valued by investors in Germany and abroad.
Thanks in particular to the stringent German Pfandbrief Act, it
is the undisputed benchmark in the covered bond market.
www.pfandbrief.de
www.pfandbrief.market