Riskante Pfandbriefe? Perish the thought.
Germany’s covered bonds are often regarded as the safest bonds in the world.
As a reminder, covered bonds are backed (covered) by the future income stream from pooled assets like public sector loans or mortgages. Unlike MBS, however, the assets remain on the issuers’ balance sheet and are ring fenced – which gives investors some protection in case of the issuer’s bankruptcy.
With that in mind, here’s an interesting chart and table, courtesy of Hans-Joachim Dübel from German think-tank Finpolconsult. The table shows the ratings distribution for assets in public sector covered bond pools, for German and non-German issuers, in 2008 and 2007:
There appears to have been a slight increase in the percentage of AAA-rated assets in the cover pool between 2008 and 2007, but there’s also been a bump in the A+ to A- range. It’s a shame the data, which are sourced from a 2009 Fitch report, don’t have a longer time series, but they should provide some food for thought.
Here’s what Dübel says:
Thin non-sovereign credit margins plus weaknesses in the law –> higher concentration of high-yield-high-risk assets . . . The reason is quite likely that most German issuers are still specialized banks, i.e. are under brutal margin pressure in retail lending and in need of spread. The Pfandbrief law, by the way, does not make any differentiation between ratings in terms of eligibility for the cover pool.
Covered bond ratings, incidentally, are derived in part from the ratings of the assets in the cover pool, and increasingly, from those of their issuers. Issuer ratings are under pressure as sovereign jitters feed into covered bond-issuing banks, many of which tend to be supported by assumed sovereign support.
If underlying assets are getting riskier then covered bonds might come under pressure from two fronts.
Related links:
DO NOT DIZPUTE ZE SAFETY OF THE PFANDBRIEFE! – FT Alphaville
Covered bond bailouts – FT Alphaville
Next up for Europe, covered bond catastrophe – FT Alphaville