FTSE Global Equity Index Series

DEBT REPORT: JUMBO PFANDBRIEFE
56
It seems increasingly
likely that issuance of 160
covered Jumbos will soon 150
spill out of Europe. A 140
number of other countries, 130
notably from central and
120
South America, have been
110
investigating the possibility
100
of issuing covered-bonds,
90
while delegates from US
have also started to take an
interest in the mechanics
of constructing coveredbonds.
“It will get very
interesting if non-
European countries come into the market, such as Mexico or
a South American country. And of course if the US enters the
mix then everything will change,”says Vortmueller.
The growth of a larger market in covered-bonds has
added length and depth to the covered-bond yield curve –
in particular the Spanish cédulas have added mass and
liquidity to the long end of the yield curve. Yet the market
has also remained largely homogenous as a result of the
adoption of similar legislation across the issuing countries.
That is not expected to change.
Juetten says: “The economic principles that drive the
development of the product are the same and therefore a
convergence of covered-bond legislation has taken place.”
The exception to this has been Britain and Italy, both of
which have issued covered bonds without the backing of
legal infrastructure – though in the case of Italy that looks
like a one off with new laws expected to be enacted soon.
The success of the British bond has paved the way for more
like it and importantly it has shown a way forward for banks
in other countries, without specific covered bond legislation.
“In (Britain and Italy) issuers have had to substitute the
legislative framework with private law. Because they are
effectively using structuring techniques and every issuer
has a slightly different documentation more caution is
needed when comparing one covered-bond with another,”
says Karlo Fuchs, associate director Financial Institutions
Ratings at Standard & Poor’s Frankfurt. The growth of
covered-bonds outside Germany has given rise to another
notable trend, namely the growth of the mortgage sector in
the market. This too is expected to continue.
Throughout the 1990s, the covered-bond market was
dominated by German public-sector lending collateralised
bonds. While the laws in the new issuing countries allow for
the issuance of both mortgage and public sector based
covered-bonds it is already evident that it is the former that
will dominate. This development could have a negative
impact on the market as it is attracting the interest of financial
regulators, who are concerned that savings banks are issuing
debt that ranks higher than the deposits of customers.
The UK regulator has already issued guidelines that no
more than 4% of total assets can be repackaged as debt.
This has put the brakes on UK issuance of covered bonds
“The high-rollers club” – Germany, Spain and France
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
as a number of building
societies are already
pressing up against this
limit. If an upcoming
liberalisation of the laws
governing issuers of
Pfandbriefe in Germany
leads to an increase in
German savings bank
issuance then the German
regulator is expected to
review its regulations.
The actions of
Data as at June 05. Source: FTSE Group. regulators and legislators
will become increasingly
important as the covered-bond market becomes ever more
international and thus competitive. In such a market the
impositions and protection afforded by regulators will go a
long way to determine the availability and popularity of the
different nation’s bonds. Thankfully, the biggest regulatory
change facing the industry is likely to have a positive
impact on the covered bonds market. The introduction of
the Basel II accord, tipped for 2008, will more closely align
banks’ capital requirements with the economic risk of
holding different financial products.
That will deliver a boost to fixed-income products in general.
More specifically it is good news for covered bonds because it
will allow a lower risk rating for mortgages – make the issuing
of covered bonds more attractive and further securing the
Jumbo market’s success for the next ten years and beyond.
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FTSE France Pfandbrief Index FTSE German Pfandbrief Index FTSE Spain Pfandbrief Index
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JUMBO PFANDBRIEFE BASICS
FIRST ISSUED IN Germany over 230 years ago
Pfandbriefe (more or less pronounced fund brief) are
covered-bonds collateralised by long-term debt – either
mortgages or loans to the public sector. Despite an
increasing geographical diversity of issuers the principles
created in 1995 – with the launch of the Jumbo
Pfandbriefe market - have been widely adopted as the
governing tenet of all of Europe’s Jumbo markets.
The minimum standards for Jumbo Pfandbriefe were
officially adopted by German mortgage banks in 1997
and updated again in 2004. They include: A minimum
issue size of €1 billion, with a minimum initial issue size
of at least €750 million. The average size tops the
€1.5 billion mark.
The use of only straight bond formats to create
Jumbo paper – i.e. fixed coupon payable annually in
arrears with bullet redemption. A minimum of three
market-makers who are pledged to quote bid/ask (twoway)
prices simultaneously for lots of up to €15 million.
Market makers should also have agreed to maintain a
standard and pre-determined bid offer spread based on
the residual life of an issue – for example the maximum
bid/offer spread for an 8 to 15 year maturity is 10bp.
JULY/AUGUST 2005 • FTSE GLOBAL MARKETS