The Pfandbrief Roundtable 2015 - Warburg Invest AG · 2018-06-08 · September 2015 The Covered...

The CoveredBond Report

The Pfandbrief Roundtable

2015

www.coveredbondreport.com September 2015

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2 The Covered Bond Report September 2015

SPONSORED FEATURE: THE PFANDBRIEF ROUNDTABLE 2015

Neil Day, The Covered Bond Report: How has the Pfandbrief market de-veloped this year?

Jens Tolckmitt, vdp: We have seen Eu28bn of gross supply in the fi rst half of the year, part of which was 22 benchmark transactions totalling Eu12.5bn. Th is is somewhat unexpected, because it is quite signifi cantly above last year’s fi gure – al-though it is very much in line with what we expected at the beginning of the year based on what our member banks reported they were planning for 2015. Th is is Eu50bn for the full year and I am reasonably optimistic that we will end up somewhere in that re-gion – in a market that, as we all know, has not been at all easy.

Michael Schulz, NORD/LB: When it comes to supply, it’s a question of negative net supply. According to the Bundesbank statistics from April, we have dropped be-low the fi gure of Eu400bn for the fi rst time, to around Eu399bn. However, it looks to me as if we are fi nding a bottom at around Eu400bn or something just a little lower, since the speed of the shrinkage is decreas-ing. On the one hand the fi gures refl ect the

shrinking of the public sector side, which may shrink a little bit further, but on the other hand it looks like the mortgage mar-ket can compensate.

Day, The CBR: Are the mortgage and public sector trends in line with expectations?

Tolckmitt, vdp: What was clear in the pro-jections we made at the beginning of the year was again substantial net negative sup-ply in public sector Pfandbriefe, and we ex-pect this to decline a little further for some time yet. Mortgage Pfandbriefe supply and outstanding volumes should increase mod-erately over the next few years. Th is takes into account the new issuers taking up the Pfandbrief and the fact that they usually concentrate on mortgage Pfandbriefe.

It is interesting to note that we are reaching the overall outstanding volume that we saw in the beginning of the 1990s and when you look at the development of the overall Pfandbrief market I believe it is more appropriate to compare it with this period than with what we saw in 2001. My feeling is that we are returning to the way the public sector business was originally

conducted back in the 1990s, when the market was around Eu400bn, so that may indeed be kind of a bottom for the market.

Thomas Pönisch, Deutsche Kredit-bank: Th at’s a good point. We are coming back to a model where we refi nance the business rather than refi nancing bond buy-ing programmes.

Tolckmitt, vdp: Is that a bad thing? Maybe not.

Pönisch, DKB: To put it frankly, no. We have a very positive view of public Pfand-briefe, but that is for refi nancing our core business. We haven’t changed this much over the past 15-20 years. We focus on the whole business around municipalities. We look at Berlin or Leipzig, for example, as an entry point into all the business related to the community, whether that be public transportation, schools, public utilities, and of course real estate (i.e. multi-family companies), which are the biggest part of our portfolio. We see it as a very good busi-ness and one to build up over the coming years. Th ere is always this talk about public sector Pfandbriefe and how it is shrinking,

The Pfandbrief Roundtable 2015

ECB measures, harmonisation, green bonds and two anniversaries – these and other developments were up for debate when issuer, investor and investment bank representatives gathered at NORD/LB in Hannover in mid-July for this roundtable

sponsored by the Association of German Pfandbrief Banks (vdp).

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September 2015 The Covered Bond Report 3


and some banks have decided to leave the business, but we are successfully sticking to the business, and we do it on a very, very granular basis.

Bodo Winkler, Berlin Hyp: We have not been active in that business for several years now. After the collapse of Lehman and all the regulation that ensued it was not appropriate to continue in this business in the same way, buying assets on the capital markets in large scale and refinancing it via public Pfandbriefe, as many mortgage banks did. We were one of the first to say it no longer makes sense and since then our public Pfandbriefe have been maturing and the assets maturing simultaneously, so it’s a very orderly process of growing out of that business. And under the circumstances we witness today there is no need to even con-sider stepping in again – and I think that is the case for many others, too.

Carsten Tegtmeier, NORD/LB: On top of that there has been a general change in thinking. Most of the banks are still in the process of shrinking their balance sheets, and meanwhile maybe due to the low inter-est rate environment there are a lot of other

investors interested in municipality debt, so most of the banks who have good con-tacts in this kind of business are not taking the assets on their balance sheets anymore but are trying to sell them directly to insti-tutional investors like insurance companies and pension funds. That is obviously, may-be in some areas or in many areas, even more attractive than just putting it on the balance sheet and refinancing it with pub-lic sector Pfandbriefe. That might change again one day, depending on the develop-ment of the margins. I can remember back in the early 1990s the margins were pretty poor yet most of the banks were happy if there was a municipality Schuldschein ma-turing and you could extend it again for a very low margin – but that doesn’t make sense anymore. Today we are living in a completely different environment.

Michaela Ecker, NORD/LB Asset Man-agement: In general we are not avoiding public sector Pfandbriefe or covered bonds. But we are looking in more detail at what is in the cover pool. We are happy to buy public sector Pfandbriefe with a granular portfolio, but we wouldn’t be happy to buy a covered bond where an issuer has just

Roundtable participants:

Michaela Ecker, portfolio manager, European covered bonds, NORD/LB Asset Management

Thomas Pönisch, head of treasury, Deutsche Kreditbank

Michael Schulz, head of fixed income research, NORD/LB

Carsten Tegtmeier, head of primary products, NORD/LB

Jens Tolckmitt, chief executive, Association of German Pfandbrief Banks (vdp)

Bodo Winkler, head of credit treasury and investor relations, Berlin Hyp

Moderator: Neil Day, managing editor, The Covered Bond Report

Photo above: Neues Rathaus, Hannover; Source: barnyz/Flickr.Roundtable photos: Janko Woltersmann




brought together a bond portfolio from all over Europe and put it into the cover pool and used the German framework to issue a Pfandbrief. We are much happier to buy public sector Pfandbriefe if we have the feeling the issuers are deeply in the busi-ness and understand what they are doing.

Tegtmeier, NORD/LB: So no repackaged public sector debt?

Ecker, NORD/LB AM: No, thanks. We are able to buy what we want by ourselves.

Tolckmitt, vdp: And there, perhaps, is the underlying factor in this overall change in business model: we are coming back to a real lending business for those banks that are actually refi nancing the public sector business by public Pfandbriefe. It’s not buying in the capital markets based on ratings or whatever and refi nancing it via Pfandbrief – there is a real loan business behind it, which is why it is more granu-lar, more burdensome for the bank, and which is also why there is a clear added value that a bank can provide to the over-all system. Th at is today the unique sell-ing proposition of public sector business in banks. And I’m pretty sure that we will continue to have this public sector busi-ness, especially based on the development of the margins – if there is an appropriate margin, then why shouldn’t other banks join in again and do it via public Pfand-briefe? Th at is really the key development

over the last few years, which should make investors more comfortable with what they are buying if they buy a public Pfandbrief.

Ecker, NORD/LB AM: It’s really necessary for me to buy something I can’t do by my-self. I can buy a Spanish region or a Spanish govvie or whatever myself, but I won’t buy something illiquid like a credit to Dort-mund, Nurnberg, Essen or whatever.

Day, The CBR: How have issuers’ individual funding plans been going in what have at times been diffi cult markets and given the ECB’s various measures?

Pönisch, DKB: We basically tried to kick start our funding early in the year because we didn’t know what was coming in terms of political risk, execution risk and so on. Spreads were down signifi cantly and li-quidity was also very good at the beginning of the year, so actually we tapped a 10 year bond and then for the fi rst time, in March, we printed a 12 year benchmark. Our un-derlying business is long term, particularly on the public side, so we decided to go for a long maturity.

By the end of the fi rst quarter we had al-ready printed roughly Eu1bn and normally we print somewhere between Eu1.5bn and Eu2bn over the full year – it actually de-pends on the deposit side. We have a huge deposit base and if we are still taking de-

posits we won’t do a new Pfandbrief issue every two months because we don’t know where to put the money – our loan busi-ness is still growing, which is fi ne, but eve-ry bank has to be careful not to cash-pile money with the ECB.

So we did as planned at the beginning of the year in terms of Pfandbrief funding, but we also frequently look at the ECB re-fi nancing facilities, of course – ultimately our participation is a question of the eco-nomics. I got the impression that the stigma of participating is not there anymore – we don’t have the impression that investors are interested in whether we took part in the TLTROs; it’s more the ECB themselves ask-ing us whether we would like to participate.

Tegtmeier, NORD/LB: We have a slight-ly diff erent situation. We have further di-versifi ed our funding strategy on a group basis. Deutsche Hypothekenbank is fo-cusing more on the real estate business, meaning the typical mortgage Pfandbrief. We at NordLB in Germany are focusing on the public sector business – and as we have heard earlier, this is at least for the time being a little bit more in the direction of placing public sector debt directly with institutional investors instead of having the Pfandbrief as an intermediary. And apart from that, we have further devel-oped our activity in Luxembourg, which is the lettres de gage from our NordLB Covered Finance Bank.

A couple of weeks ago we tapped one of our outstanding issues and the reason was similar to what Th omas said: there was a nice enquiry from the ECB, and on top of that there was also a reverse enquiry from a couple of domestic investors and so we decided to proceed with that.

Looking to the second half of the year, we don’t have any major projects around the Pfandbrief in mind. But we are one of the friends of the aircraft Pfandbrief and we have seen a little bit of movement from the rating agencies. We started with being granted just one uptick in terms of rating from the senior debt, and this has become a little bit better, so developing that further is something we have in mind for the last quarter of 2015. But in terms of the public sector so far we don’t have any major activi-ties in mind in Pfandbriefe.

Bodo Winkler, Berlin Hyp: ‘We are speaking more and more about windows of opportunity’




Winkler, Berlin Hyp: Th e major project for us in Pfandbrief this year has been our Green Pfandbrief and the planning for this was obviously a little bit diff erent than for typical issuance. We could not have come with that at the beginning of the year as we had so much work to do beforehand – the preparations took almost half a year, get-ting the second party opinion, having our internal reporting, the website and all that. We issued when we were ready in April.

We originally planned to issue a fi ve year bond, but when we did our roadshow it was no longer the best idea because we arrived in that slot where interest rates were at their very lows. Five years would have meant that we might have come into nega-tive yield territory and most of the inves-tors said, no, anything but a negative yield, please. So we checked again and were able to do a seven year deal instead, which had a coupon of one eighth – which was then, I believe, the lowest coupon ever on any sev-en year covered bond – and a spread of mi-nus 16bp. Th e order book was nevertheless four times oversubscribed and we attracted a lot of new investors from the responsible investor universe, so that was a very good experience.

Th e bond was very independent of ECB demand. Our intention was from the beginning to have a small portion of the bond allocated to non-sustainable inves-tors, as the ECB is by defi nition – they do not buy us in normal times, so only for this programme – but it was really our in-tention to grow our investor base and we were able to do so.

Looking more broadly at the market, we are speaking more and more about windows of opportunity. I remember quite well times when you could issue a Pfandbrief whenever you wanted; nowa-days issuers wait for issuance windows and if one opens you have to move. Th e high volatility in interest rates is just one driver of this development.

Schulz, NORD/LB: I think it is impor-tant to talk about the purchase programme in a little more detail. I am pretty sure that everyone at the table agrees that no Pfand-brief issuer welcomed the ECB coming with the purchase programme because the Pfandbrief market didn’t need the ECB

stepping in, buying big chunks. Having the ECB in place, with purchases related to the capital key, means that the Pfand-brief will be the biggest market that they have to buy. So we had a very stable and very tight market before the ECB came to the market and in the last 10 months we have seen an even tighter market.

Some investors I have spoken with nev-ertheless said that they are not very un-happy that the ECB is in the market, that they are a normal other investor – that is a fair position, although I don’t agree. My

point of view is that the Pfandbrief is the benchmark in covered bonds so if the whole market is getting tighter the Pfand-brief will get tighter still, and this makes it pretty diffi cult when it comes to the inves-tor base because at these tight levels no real money investor is very happy about buying Pfandbriefe anymore.

Ecker, NORD/LB AM: We welcomed the ECB when they started the market again with the fi rst and second pro-grammes. We were happy to see the ECB fulfi lling their responsibility to get the market liquid and restarted again. But truly the third programme wasn’t needed because everybody was buying

covered bonds. Th ere was really no need for the ECB to buy covered bonds. And if interest rates are tending to zero and spreads going deeply into minus, I would change from an investor to a sponsor for covered bond issuers. Sorry, but it’s not in my interest. Besides that there are the consequences like being crowded out of new issues, books being artifi cially in-fl ated, not getting a satisfactory alloca-tion. So why should I welcome the ECB with a third programme? And if you look at covered bonds from Spain or Italy, for example, they are tending towards the levels of, say, Sweden and the UK. Is that really what we want to see?

Tolckmitt, vdp: I think it’s a very impor-tant point, that this is not something that is only aff ecting the Pfandbrief market: it’s an overall issue for the covered bond mar-ket. We had a compression of spreads re-sulting from President Draghi’s “whatever it takes” announcement, so they were al-ready artifi cially compressed when CBPP3 started, and then they compressed even further. Aft er the beginning of the crisis, over a reasonable time span spreads had at least refl ected the real diff erences between products again, but that was then levelled out once more not only by CBPP3 but also the measures taken by the ECB before, and I think that is unhealthy.

Tegtmeier, NORD/LB: Th is market is not working the way it normally works, be-

Thomas Pönisch, DKB: ‘We didn’t know what was coming in terms of

political risk, execution risk and so on‘

‘No Pfandbrief issuer welcomed the ECB

coming’




cause you have a kind of synthetic buyer, Mr Draghi, who goes shopping every day. He can print the money in his backyard, so that is not a real money investor. Maybe for some issuers it is a nice game for a while because you are able to fund yourselves on very favourable levels, but 20%, 40%, 60% of what you are doing is going directly to the ECB. Th e number of real money inves-tors is, I would say, decreasing. So what is left is a couple of traders hoping they might sell their positions in a week or two as long as Mr Draghi is still on his shopping tour. But what happens if that shopping tour comes to a stop? Th at is what we learned roughly six weeks ago, when suddenly you are left sitting on positions, on levels where you say, well, I’d better sell it, and then sud-denly you look around in the market and everybody says, no, please not me, don’t hit me. And this is not a healthy development.

Pönisch, DKB: But we shouldn’t forget that the third programme is actually fo-cused on peripheral countries and juris-dictions that have not been the tightest or which didn’t have the liquidity – it is not only about spreads, it is also about liquid-ity. Some issuers in those countries were not able to tap the market, so actually Draghi put them in the position where they could again go to the capital mar-kets. And we shouldn’t also forget the end of 2011 when this long term refi nancing operation actually restarted a market that had been closed because of the problems

arising in some countries. So we should give them a bit of credit that they reo-pened even these covered bond markets. Of course, you always have two sides and the fl ipside is that you now have artifi cial-ly low spreads in the Pfandbrief market.

Day, The CBR: To what extent did the expansion of QE beyond cov-ered bonds (and ABS) mitigate the impact of CBPP3? Was that a wel-come development and did it per-haps temper the impact?

Ecker, NORD/LB AM: We had diff erent reactions from our clients. Some closed down special covered bond mandates and migrated to corporates or the like. Some reopened their portfolios – at least at the beginning – for the periphery, at least –even for peripheral government bonds – when they for years cut them out. Th ey thus tried to get around the really expen-sive covered bonds.

Th e second problem is clearly the level of interest rates. If we were on a level of let’s say 2% or 3%, nobody would argue with minus 16bp or so. But if you are already at 0.20% and you get minus 16bp… I am not allowed to buy negative yields.

Day, The CBR: The European Com-mission is preparing a paper on pos-sible covered bond harmonisation. What do you want from this? What do you expect? What do you fear?

Tolckmitt, vdp: As we have reiterated, the German Pfandbrief community is in favour of harmonisation as long as it is high quality harmonisation leaving lee-way for diff erent countries to develop their product further. Th at is not only because we want to keep the Pfandbrief – certainly, we want to – but we think that we have been successfully developing the product into a quality benchmark and that would no longer be possible if you only have one product in the European market. Luckily we do not expect the Commission to actually adopt a maximum harmonisa-tion approach where you end up having one product. From what we know so far, I would expect us to end up somewhere in between a minimum harmonisation ap-proach and a 29th regime approach where you basically have all the national covered bonds remaining in place and the Euro-pean Commission thinking about devel-oping their own European product. Th ese are the most likely elements of such a pa-per and if that’s the case, and given that we are in an early stage of discussions, I think we can end up with a very satisfying outcome in one or two years’ time.

Schulz, NORD/LB: I would welcome the harmonisation of the covered bond market where it makes sense. But we have a market with very diff erent countries and with very diff erent histories, and in some cases the covered bond products diff er in one way or another to refl ect this, so therefore it doesn’t make sense to harmonise everything. Th e Commission has to take into account these diff erences and what lies behind them. We then have to think about what it makes sense to harmonise. Th e Commission re-ally has to look at the details.

Winkler, Berlin Hyp: In the end you cannot totally harmonise a product if all the legal aspects underlying it are not harmonised, too – we have totally diff er-ent insolvency laws across Europe, totally diff erent mortgage laws, and diff erent ap-proaches to our overall civil legislation. And so that makes harmonisation really almost impossible.

Th erefore I think that setting useful minimum standards would be a good thing, making it easier for investors to

Carsten Tegtmeier, NORD/LB: ‘You look around in the market and everybody says, no, please not me, don’t hit me’




compare products and to be able to rely on certain aspects and standards already being fulfi lled simply because it is a cov-ered bond.

Tolckmitt, vdp: We all have to bear in mind that this is, in my view, a pre-requisite for keeping in the medium to long term the preferential treatment that we have for cov-ered bonds in other European regulation. Some are critical on this issue, whether or not the preferential treatment should stay in place. We as the industry have an interest in keeping the preferential treatment and one of the elements in making sure that this happens is getting a stronger partly harmonised defi nition of what a covered bond is, and one that regulators feel com-fortable with.

Day, The CBR: From an investor’s perspective, are you in favour of this?

Ecker, NORD/LB AM: Yes, clearly. As has been pointed out, it makes total sense to harmonise those aspects of covered bonds that it is possible to harmonise. It will be much easier for us to compare the diff er-ent jurisdictions. But the most important aspect for us is not to dilute the stricter ju-risdictions that we have, but to keep that.

Schulz, NORD/LB: Th e question for in-vestors is: what are we gaining and what are we losing? Under harmonisation we may gain confi dence and maybe a com-mon understanding, but we would lose diff erentiation and thereby lose opportu-nities from an investors’ perspective. To-day, you have core markets and non-core markets, so there is an opportunity to buy diff erent markets, spread-wise and risk-wise, but these opportunities would be lost via harmonisation.

Day, The CBR: When it comes to minimum standards, that could cover collateral types: mortgages, public sector loans, SMEs, ships, aircraft… So far different regulatory standards include some but not all of those. Should they all be includ-ed? Where should the perimeter be drawn?

Tegtmeier, NORD/LB: When it comes to SMEs and covered bonds, we take a very conservative view. Because if you start to include SMEs in covered bond legislation then it’s not so far before you are on to credit loans and student loans and tricky things like that. So therefore the Germans have a very strict defi nition of what kind of Pfandbrief types should be available, and of course that is the traditional pub-lic sector and mortgage Pfandbrief, and besides that we also have a Pfandbrief

law on ships and on aircraft , and that’s it. Whether in future there might also be asset classes like renewable energies, with wind turbines and the like, that is a question of whether there is it is an asset class that might be more appropriately re-fi nanced through other instruments, and also a question of volume.

Th e Germans have benefi ted so far from a very clear approach to what a Pfandbrief is and what can be put in the cover pool, and this is supervised by law, and my view at least at this very moment is that we are quite well on track with that.

Tolckmitt, vdp: You also have to look at where the discussion is coming from. When you talk about SME loans being

included in the Pfandbrief, apart from being sceptical about the quality and the comparability of SME loans also to ship loans and aircraft loans, I would ask: is it something that the market re-ally needs, is it something that banks really need? And yes, there might have been times when banks needed covered bonds for basically everything, but that time is over, and we are now in a situa-tion where banks have ample liquidity, have many ways to fund themselves, and maybe there is no need to have a cov-ered bond to fund SME business.

Th e next question is: does the political expectation that SME covered bonds will translate into cheap loans for SMEs really hold true? Maybe not. I would say it may be a cheaper funding instrument for banks, but there is no automatic transmission mechanism from the funding side to the lending side – the pricing on the lending side is based on a risk assessment and not necessarily on the question of how cheaply you can fund yourself.

And anyone who is politically consid-ering introducing this kind of asset class should consider all of that.

Sometimes it is said, look, the Germans already have this kind of aircraft or ship covered bond. It’s true, but the ship Pfand-brief market has a volume of, aft er more than 80 years, Eu8bn or less, and it’s similar for the aircraft Pfandbrief. Th ese are spe-cialised products, but these volumes can also be taken as an indication that maybe

‘What happens if that shopping tour comes to a stop?’

Michael Schulz, NORD/LB: ‘It doesn’t make sense to harmonise everything’




a new SME covered bond product will not translate into a huge market because it is not needed by banks.

Winkler, Berlin Hyp: And when we think of what Jens said just a couple of minutes ago, from a more political perspective, that we really want to keep the Pfandbrief ’s privileges, I can hardly imagine that this could be achieved if you extend the asset class by using more and more types of col-lateral so you are not that focused anymore. If we look at countries that have introduced covered bonds and at which asset class they have developed in the fi rst instance, it is always the mortgage covered bond. Meanwhile in the case of Germany, aft er a period where we have seen this exaggera-tion in public sector covered bonds, we are returning to the same again. So this is obvi-ously somehow the core of what should be a covered bond.

Tegtmeier, NORD/LB: It is also a bit tricky from the technical point of view, be-cause if you look at the Treuhander, he has very strict guidelines if he is looking at the mortgage for a building or at a public sector loan or an aircraft or a ship. But how should he value a loan to an SME? You would need to be some kind of credit analyst.

Ecker, NORD/LB AM: Clearly there is a diff erence between SMEs and the tradi-tional collateral, because how should I ana-lyse SMEs? I feel able to look at a mortgage

market, at a public loan, but I don’t feel qualifi ed to look at SMEs.

Tolckmitt, vdp: If I could add one thing, and I think that diff erentiates also the fre-quently mentioned aircraft and ship loans from SME loans: when we in Germany over time developed the law we always looked at whether there is a comparable

structure to mortgages around the as-sets in the cover pool, and that’s true for ships and for aircraft , but it is not true for SME loans. You have a tangible asset that you can use, you have a register for all of them where you can see what your rights are. You have long term loans. And that is very important and is the reason why we are sceptical about everything that doesn’t feature this.

At the vdp we looked for quite some time and in quite some detail into renewa-ble energy as a possible asset class for a clas-sical Pfandbrief, and so far we have decided against it because while it looks at fi rst sight pretty much like mortgages, because you have a tangible asset, it’s not comparable, and as long as we don’t have these prereq-uisites we would not opt for something called Pfandbrief in that area. Maybe you can use it for a covered bond in some kind

of structured form or whatever, but it is not suitable for a Pfandbrief.

Tegtmeier, NORD/LB: And I wouldn’t call it a covered bond, I would call it a col-lateralised bond.

Schulz, NORD/LB: To introduce anoth-er perspective: we spoke very intensively about asset encumbrance a year or two ago – I don’t hear anything about that anymore, but expanding the list of possible assets would mean that the asset encumbrance discussion would quickly return.

Pönisch, DKB: We are, if not the largest, one of the largest banks in fi nancing re-newable energy with total loans of approxi-mately Eu8bn. We have a very, very large portfolio, and we think that it is certainly worth looking at what instruments could fi nance this. It is not clear what kind of bond it might be in the end, but we should be careful not to leave that business to oth-er parties, namely insurance companies or other investors, because they are searching for yield and if we don’t do it, they will. Our goal is to be a sustainable participant in the market. We have an annual new business in that area of Eu1bn, which is a lot for a bank of our size, and we want to continue to do new business. We have to fi nd the best way to refi nance that business. We can’t do it by means of covered bonds, but there might be other interesting ways of doing it. It’s an interesting topic and that is why the vdp is looking at it every now and then, and at ways to sustain it in the banking market.

Day, The CBR: Bodo, you spoke a little earlier about how your Green Pfandbrief went. Perhaps you can tell us about the rationale behind it.

Winkler, Berlin Hyp: We looked at Green Pfandbriefe quite early on, namely around about fi ve years ago. We were seeing a sig-nifi cant trend on the asset side, especially in foreign European countries, of prop-erty investors investing in certifi ed green buildings, and some of them were already fi nanced by us. But in those days the vol-ume was not big enough to issue a Green Pfandbrief against. Th is changed over time because the business increased. You see

‘We really want to keep the Pfandbrief’s

privileges’

Michaela Ecker, NORD/LB AM: ‘Clearly there is a difference between SMEs and the traditional collateral’




more and more of these certifi ed sustain-able buildings, and so we thought it would be a good idea to have a special sustainable refi nancing tool for sustainable assets on the other side.

Th is fi tted quite well with other devel-opments: we have already discussed how the one or the other investor is leaving the market and our wish in Berlin Hyp is to broaden our investor base again with real investors. As mentioned earlier, our Green Pfandbrief allowed us to do this. Investors, bankers and other market participants con-sidered the issue to be a real innovation and I think that is one of the reasons why it ul-timately attracted such a large order book. You have more and more investors – be they banks, insurance companies or asset managers – who have special funds that have to be invested only in green bonds. Th ese investors want you to report in a very specifi c way, so you have to explain exactly where the environmental benefi t is, which is not too easy. So you need quite a lot of preparation to be able to do that. But in the end it worked out for us.

What we would really like to do is en-courage other issuers to look at what Berlin Hyp has done and go in a similar direction. Maybe this could be for the one or the oth-er a blueprint, or at least a stepping stone towards something similar. In the overall green bond market there is such great po-tential, and I think Pfandbriefe and covered bonds fi t very well to that market because at the end of the day so much about this market is about transparency, and we are transparent as well, on our cover pools. Th e product Pfandbrief meanwhile has certain sustainable aspects inherent to it via the Pfandbrief Act. And so if you are a Pfand-brief issuer so many of the prerequisites for going to that market have already been met. I really can recommend to any other issuer checking this out and creating some-thing similar.

Pönisch, DKB: As I said, we are looking at that topic very closely. We have seen an ESG (environmental, social, governance) bond and now a Green Pfandbrief, and it is no secret that DKB has a very, very large sustainable portfolio of loans to the renew-able energy industry, to municipalities, to multi-family companies – so not only

green assets, but also socially responsible lending in many categories. Roughly 60% of our loan portfolio is sustainable, which is a very large sum – you can actually do a lot with it and of course we fi nd this topic very interesting. We are looking into it at the moment, doing our homework. In what format this will ultimately be remains to be seen – although I don’t think it will be a Pfandbrief.

Tegtmeier, NORD/LB: If the issuer is aligned and the law is aligned then it would probably make more sense to have a sepa-rate cover pool, because what is the defi ni-tion of a green bond? I know some French names which are issuing green bonds that are running nuclear power stations – I don’t know if this is the same understand-ing of what we might have of a green bond. And if you are giving money to munici-palities and then they are renovating their council houses, making them more energy effi cient, this is in a way a little bit green, too. But the issue is: who can prove that?

And speaking from the issuer side, as long as there is no advantage in terms of pricing for such a product then it isn’t really appealing because, as our friends at Berlin Hyp have shown, it is a lot of work.

In the longer term it might become an

option, but I think we should work more on the development of standards. Th ere are some basic standards, but as an inves-tor you have no guarantee what the issuer is doing with the money which he is raising in green bonds.

Pönisch, DKB: Th at’s why we take the ap-proach that we fi rst of all prove that our business is sustainable. And with 60% of total loans of roughly Eu60bn we certainly can do that. Of course, our money can-not be marked, as such, but if we go to the market for Eu500m and say that it is a green bond, we don’t need to prove that we invest the proceeds into sustainable as-sets because our new business in that fi eld is signifi cantly above the common bench-mark size of Eu500m. So you have to prove that you are really taking this sustainable and green funding seriously, and not just because it is a hot topic. You should be careful to have a really sustainable business and also a sustainable market presence, be-ing a long term oriented issuer. Th at’s why we our doing our homework fi rst and – as Bodo said – there’s a lot of work to do. But once we are there we will certainly not then be a one-hit wonder.

Winker, Berlin Hyp: I would really like to reply to what Carsten said. Of course you can prove that you use the proceeds of this issuance properly. Th is is the role of the third party, to confi rm, yes, they re-ally spent such and such amount on such

Jens Tolckmitt, vdp: ‘In the long run you have to have some kind of standards in order to defi ne an asset class that merits the name Green or sustainable‘

‘What is the defi nition of a green

bond?’




and such project. Berlin Hyp will be very open on that. We will state exactly which of our projects fulfilled these standards. The standards that we set ourselves are public, so everybody can see them. We will do this new business reporting every year. We will then show it to our second party opinion provider to verify each year that we com-plied with our own use of proceeds. So I think you can do that.

It is always difficult to say this is green, this is brown, this is blue, or whatever. But ultimately, these very focused inves-tors have their own definition of what they consider to be green. They have their standards, and either your bond fits or it doesn’t fit. They have tools to analyse this, and they only will buy you if you fit their standards. So for this very dynamic but still very small market, green bonds, it’s very good that we have no real definition of what green is, in the end, but give this market the opportunity to grow first. And at the end of the day I think that every bond that is able to provide an environ-mental benefit is a good thing.

Tolckmitt, vdp: I fully share Bodo’s view that there is a kind of natural link between a product like the Pfandbrief and the idea of sustainability. But I do think that in the long run you have to have some kind of standards in order to define an asset class that merits the name Green or sustainable or whatever. And you see that with other asset classes already. Otherwise you will end up having borders that are blurring into products that are maybe not as green as they pretend to be, and by discussing early on at least what these standards could be you can help such an asset class or sub-asset class to grow.

Winkler, Berlin Hyp: Because we already have such standards as the Green Bond Principles, I think it would maybe be the vdp’s task not to define what is a green bond, but the minimum standard for a Green Pfandbrief.

Ecker, NORD/LB AM: We can affirm growing demand for green bonds in terms of volume and number of our clients. The reasons are to avoid negative headlines, a firm conviction, and even better perfor-

mance, at least over a longer period. But since it means more complexity regarding the investment process we won’t appreciate higher prices or tighter spreads for these bonds. And to say it once again, the low in-terest environment makes it nearly impos-sible to accept fees of any kind.

Day, The CBR: How are German property markets developing?

Winkler, Berlin Hyp: Demand for Ger-man property, be it commercial or residen-tial, is still very high. We see yields again this year going down and prices going up – especially in the top locations in the big metropolitan areas. And of course you can wonder a little bit when this might come to an end.

On the other hand you have this ongo-ing low interest rate situation, you have a lack of investment alternatives, and you have the very good economic situation in Germany with a labour market that is working very well and very efficiently. This would speak for the continuation of the price development.

Pönisch, DKB: DKB’s largest loan portfo-lio is to the multi-family housing industry, so we have exposure to the residential mar-ket in large cities and also B cities, and I can only confirm that the cashflow generation of those companies has been going up sig-nificantly over the past 10 years. And the market value of the Pfandbrief collateral – which is ultimately what we are discuss-ing here – has largely developed very posi-tively over that period. Of course in every city there may be some streets where prices have sky-rocketed because some guys from abroad are just pumping money into the market as a safe haven. But the market is still healthy in Germany, where you have a very, very good economy.

Winkler, Berlin Hyp: Yes, but in a way you have to monitor developments more carefully nowadays than three years ago. That’s at least what we do in Berlin Hyp.

On the other hand, you have a situation that differs, happily, quite a lot from what we saw between 2005 and 2007. Inves-tors, because of the availability of cheap money, are bringing a larger share of own capital with them when they invest into real estate, so you don’t have this high leverage that you witnessed in those days. And I think that is really one of the big differences that makes us all feel more comfortable.

Tolckmitt, vdp: And one thing that is again evident in the current environment is the sustainability of the regulation around the Pfandbrief. You have a widening gap between what other countries call the mar-ket value and our mortgage lending value (MLV). This is positive for the Pfandbrief investor because the question of how much you can put in the collateral pool is based on the MLV, and so the buffer is growing.

Day, The CBR: The 10th anniversary of the Jumbo Pfandbrief was cele-brated with some fanfare in 2005, but the 20th anniversary in May passed with little comment. Did you have any celebrations in Berlin?

Tolckmitt, vdp: No, we didn’t. Obvi-ously everybody knows the market today has changed a lot towards a new normal, which is benchmark issues. But I would still say something in favour of the Jumbo Pfandbrief. If we hadn’t had the Jumbo Pfandbrief, I would say that we wouldn’t be sitting around this table, that a number of countries wouldn’t have covered bond jurisdictions, that Neil Day would not have worked at The Cover nor at The Cov-ered Bond Report. And we also wouldn’t have the attention – good or bad – from European regulators regarding our prod-uct – that is very important and shouldn’t be forgotten.

Twenty years? The attention span of capital market participants is normally measured in weeks or months rather than years, so 20 years in the capital market sphere is quite a lot. And coming from the original Pfandbrief market that we had be-fore 1995, the Jumbo Pfandbrief was a big leap and a catalyst in restarting the market, developing the market, and making it in-

‘You have to monitor developments more

carefully’




ternational. That is still the case – no matter what has happened in the interim.

There are reasons for Jumbo Pfand-briefe no longer being around as they used to be – one of them being the public sector business on the asset side – but there are still reasons to say positive things about the Jumbo Pfandbrief.

Tegtmeier, NORD/LB: The best idea ever was bringing to a very safe product liquid-ity that is to a certain extent comparable to what we have seen in government bonds, and therefore there was a need for bigger volume. When I remember the old times, we started with DM500m, then DM1bn, and from one night to the next we did Eu-1bn instead of DM1bn – so we doubled it in just two days. Sometimes it was a little bit overheated in terms of volume, but this is part of the past, no doubt about it.

You are absolutely right: some other jurisdictions thought that the German Pfandbrief had a huge advantage com-pared with other asset classes in Europe and that was more or less the starting point for other jurisdictions to join in with the covered bond products – sometimes simi-lar, sometimes slightly different – that we have today. From that point of view, even if nowadays Eu500m is normal, the Jumbo Pfandbrief is an ongoing success story, I would say.

Winkler, Berlin Hyp: To add some-thing to Jens’ list of what we all would not have, the LCR, for instance – we would not have the privileged treatment that we now have. And if we come back to the low interest rate environment and the lack of interest of some real money investors in buying covered bonds today, their inclusion in the LCR and privileged treatment opened up an alternative in-vestor base.

Schulz, NORD/LB: And the main idea was to create a liquid market and a liquid product. What we learned since the crisis is that even though you may have a Eu5bn Pfandbrief outstanding, this product hasn’t necessarily been liquid – you have to find a buyer for it. This is what liquidity ulti-mately means. And a Eu500m deal could be more liquid than a Eu5bn one.

Day, The CBR: Another birthday, not 20 years, but 10, for the Pfandbrief Act. Did it have such a life-changing impact as the Jumbo did for me?

Tolckmitt, vdp: First of all, there was no alternative to the abolition of the Mort-gage Bank Act, because it was something that would otherwise have been a consti-

tutional issue in Germany. We therefore had to open up the formerly specialist bank principle and offer the issuance of Pfandbriefe to basically everybody. And at the same time public sector guaran-tees behind public sector banks’ issuance activities enshrined in the Public Pfand-brief Act were abolished so the need to create a uniform and comprehensive le-gal basis for Pfandbrief issuance became even more pressing.

The important thing was to make sure that the safety perception of the Mortgage Bank Act was transposed into the new era. That work was done mainly by the VDH/vdp and I think we have been successful at that.

The most important consequence was that, especially in the financial crisis, the role of the Pfandbrief changed from a funding instrument of certain specialist

banks and public banks that were allowed to issue Pfandbriefe into a strategically im-portant funding instrument for more or less every bank. Clearly that was mainly a consequence of the crisis, but it wouldn’t have been possible for many banks to actu-ally get the Pfandbrief if there hadn’t been a general Pfandbrief Act.

Tegtmeier, NORD/LB: It was also a big advantage for investors, because suddenly they got new names for the Pfandbrief, where they still had lines in place. This brought more liquidity to the market as a whole, so from that point of view it was the best thing that could happen.

Pönisch, DKB: We are the best example, really, because we would not have been able to issue a Pfandbrief if the Pfandbrief Act hadn’t come to life in 2005. Now, when I go to investors, I tell them, OK, we have three main pillars of funding and one of the most important on the capital markets is the Pfandbrief. So this was a huge opportunity for us, and we can only say thank you to those who arranged this.

Without the Pfandbrief Act we would not have been able to tap that liquid mar-ket in the early months of the financial crisis, after having luckily already printed our inaugural bond in 2006. The execution opportunity provided by the covered bond market was a big strength for us during the crisis – as it was for other banks. n

‘It was the best thing that

could happen’


Quality by tradition: Even in troubled times, the Pfandbrief

is an especially sound investment. Its first-class quality and stable returns on

investment are valued by investors in Germany and abroad and, thanks in

particular to the stringent German Pfandbrief Act, it will remain the bench-

mark in the covered bond market.

w w w . p f a n d b r i e f . d e

The Pfandbrief Roundtable 2015 - Warburg Invest AG · 2018-06-08 · September 2015 The Covered...

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Transcript of The Pfandbrief Roundtable 2015 - Warburg Invest AG · 2018-06-08 · September 2015 The Covered...