annual report - Hypo Real Estate Holding AG

DEPFA First Albany’s origination and distribution team
includes 71 professionals. Highlights of DEPFA First
Albany’s 2007 activities include ongoing advisory work
for the Port Authority of New York and New Jersey,
Denver International Airport and other major airports
around the US, participation in the State of Ohio’s
US$5.5 billion securitization of tobacco settlement
revenues and participation in US$12.6 billion financings
for the City of New York and the State of New York.
In 2007 DEPFA purchased a total of US$12.5 billion of
US originated bonds with a continued focus on high
credit quality (the average rating of these investments
was AA1) with a weighted average life of c. 10 years.
The two main investment categories were government-backed
student loans and taxable municipal
bonds; these two sectors represented over 80% of
purchased paper during the year.
Overall the government-guaranteed student loans
market totaled c. US$60 billion in 2007, and DEPFA
continued to play a significant role with close to US$7
billion of direct purchases. The Bank particularly enhanced
its reputation in this market by acting as both
an investor and co-manager in the ‘SLMA 2007-4’
US$5 billion ‘AAA’ student loan deal. In common with
other asset classes after the liquidity crunch/subprime
contagion, there has been a widening of student
loan spreads since August, but it is important to recognise
that there has been no change to the credit
quality of the underlying collateral. Having said that,
this market does face challenges in 2008, mainly due
to new government legislation (the Higher Education
Act), which has reduced considerably the fee income
generation potential in this sector and therefore the
general level of profitability. Despite the challenges in
this market, the cost of education and enrollment continues
to increase, and hence the need for educational
loans will remain strong throughout the year.
Taxable municipal issuance was largely in line with
2006 at US$27.4 billion, and DEPFA’s share of that primary
market was c.11% in 2007. Overall issuance of
larger deals was scarce, and at times the Bank found
it difficult to source paper. Despite the fact that a
number of US states have material under-funded
pension deficits, few states chose to tackle this situation
through term bonding in 2007. Given the lower interest
rate environment in the US, the Bank would
anticipate that this will become a more attractive
option in 2008, and would expect more issuance. Its
specialist pension advisory business is well positioned
to assist its clients in determining the optimal strategies
to follow.
As DEPFA had forecast, there was continued strong
growth in the stranded asset sector as utility companies
chose to finance environmental costs for equipment
and build reserves through the issuance of
securitized bonds. A number of issuers came with
state-supported bonds in 2007, including Texas, West
Virginia and Florida – and DEPFA was able to increase
its exposure to these highly rated state backed bonds.
The Bank continues to research new product invest-
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