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Germany's novel covered bond
Asset Securitization Report--SourceMedia (March 26, 2007)
Landesbank Berlin is set to create a new chapter for German structured covered bonds as it begins premarketing a new transaction that combines German covered bond (Pfandbrief) and securitization techniques. The new deal potentially opens the door to cheaper financing for the hundreds of German savings banks that are, at the moment, priced out of the more traditional German Pfandbrief market.
It is the first time that a covered bond program has been established in Germany under general German law, in contrast to many other European covered bonds that rely on specific legislation. The incorporation of securitization techniques has enabled the sponsor to create a covered bond that shares characteristics with covered bonds backed by a specific legal framework.
"To me the whole thing looks more like a classical RMBS transaction and not so much like a covered bond," said Claudia Vortmuller of covered bonds research at Commerzbank Corporates & Markets. "However, one thing that is a typical covered bond feature is the fact that you have direct recourse to Landesbank Berlin. In terms of lending value [they] adhere to Pfandbrief legislation. However, Landesbank Berlin always has the option to amend the program."
Landesbank Berlin's Christian Scheibe said that, although the structure does employ technology from securitization structuring, a major difference is that there is no true sale or SPV behind Landesbank's transaction. The "secured bearer bond," as Scheibe coined it, incorporates all of the ideas of the pfandbrief, although the program has been structured using securitization techniques to fence in the cover pool upon insolvency of the sponsor bank. This enables the issuer to create a covered bond that has similar characteristics to the covered bonds backed by a specific legal framework, explained Moody's Investors Service analysts.
Moody's applied its general covered bond methodology and extended it to take into consideration the three levels of protection - LBB, Sparkassen and the mortgage pool - present in the transaction. "Moody's approach to covered bonds considers that the ratings of the notes are linked to the probability of the issuer default, as covered bonds are a bank's debt," he explained. "However, in this particular structure, the rating of the notes is linked to the joint probability of both the issuer and the relevant sparkassen defaulting, as most of the risks (refinancing or market risks) materialize only if the default on both entities occurs."
From a credit perspective, the structure employed by Landesbank Berlin can even offer some advantages over issuing a straight-out pfandbrief. "Some risks specific to covered bonds, such as refinancing risk (as the "natural" amortization of the cover pool assets may not be sufficient to repay the notes at the maturity) have even been reduced as compared to other covered bonds," said Jose de Leon, vice president and senior analyst at Moody's. "Furthermore, the 12-month built-in extension maturity is an inherent source of liquidity in the structure, and it makes it more likely that the cover pool will be sold prior to the extended final maturity date at a price that will make covered bonds whole."
Commerzbank's Vortmuller explained that, under the Landesbank structure, the issuer transfers the loans under the new concept of the refinance register and not under the covered pool as is usually the case when dealing with a straight-out covered bond structure. For smaller savings banks, having this as an alternative option would lessen restrictions prescribed under the pfandbrief act that currently hinder their access to the German structured covered-bonds market.
Landesbank's Scheibe said that the bank plans to issue its own loans with an 80% LTV in this initial transaction, slightly higher than the 60% LTV limit set out under the pfandbrief act. However, he said that his firm would like to start incorporating loans from some of the smaller banks that have healthy books. He hopes future issuers will be encouraged by investor appetite for this inaugural transaction and added that investors now have an opportunity to hold German savings bank assets from these smaller banks.
"With this structure we address the needs of smaller banks that do not have the critical mass to issue a Pfandbrief but nonetheless have a very good mortgage portfolio," Scheibe said. He estimated that Germany had around 460 savings banks, some of which had the critical mass on the balance sheet to issue Pfandbriefe, but others did not have enough to make an issue cost effective.
"The structure also offers more flexibility in terms of frequency of issuance," Vortmuller said. "Under pfandbriefe law, an issuer must issue every two years, so when you issue and what you issue is closely regulated."
Spain and France have both issued covered bonds structured outside of their respective legislation. In Spain, the largest issuer, AyT, is an SPV, which issues bonds backed by a pool of up to 43 savings banks. These bonds, in a strict sense, are not cedulas (bonds issued under Spain's specific covered bond legislation) and benefit from securitization mechanisms such as extension maturity or liquidity lines. In France, structured deals and solutions coexist with the obligations foncieres.
"Our experience in other jurisdictions is that structural solutions may coexist with covered bonds based on specific covered bond legislation, and they might be complementary to them, for example, to fund noneligible assets or to pool multi issuer deals," Moody's de Leon said.
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