More on those potentially riskante Pfandbriefe — this time from Barclays Capital.
Analysts of the German covered bond note that questions over Pfandbriefe’s exposure to European peripherals — places like Greece, Spain and Portugal — have increased in recent weeks along with sovereign jitters. And so, BarCap’s Leef Dierks and Fritz Engelhard have done some number-crunching.
Below a table showing public sector Pfandbriefe’ exposure to BarCap forbidden acronymic countries:
So that’s public sector Pfandbriefe having 10 per cent exposure, on average, to European peripherals.
The thing to note though is that the exposure of individual Pfandbriefe could vary considerably. As was mentioned yesterday, German law doesn’t restrict the ratings composition of the assets in the cover pool; in theory you could have a Pfandbrief with 100 per cent exposure to Greece, for instance.
As it is, the highest peripheral exposures look to be at Deutsche Genossenschafts-Hypothekenbank (DG Hyp) and Deutsche Pfandbriefbank (Hypore) at about 26 per cent of the cover pool.
Should investors be worried about Pfandbriefe peripheral exposure then?
BarCap sees a number of reasons why they could be:
Above-average exposure to peripheral euro area sovereigns might be of concern to Pfandbrief investors for a number of reasons. First, the recent spread widening on European peripheral sovereigns might have caused valuation losses on most exposures listed in Figure 1. Some banks have a rather thin capital base in order to cope with such losses. In a wind-down scenario, some of the losses might need to be crystallised in order to ensure a timely servicing of maturing Pfandbriefe.
Second, investors with a very bearish view on the future development of these countries and their membership in the euro system might start to become concerned about potential defaults and recovery values on the respective underlying cover pool assets.
Third, negative rating migration on these exposures might worry some investors, as this could pressurise some investors to increase over-collateralisation and/or amend the composition of the cover pools in order to maintain Pfandbrief target ratings . . .
Despite the above concerns, we would not be too bearish on the performance of outstanding public sector Pfandbriefe . . .
Wait, what?
According to BarCap the public sector Pfandbriefe market does have some things going for it. For a start, it has the possibility of being bailed-out by the German government:
Despite the above concerns, we would not be too bearish on the performance of outstanding public sector Pfandbriefe. In particular, we note that on 13 October 2008, when introducing the stabilisation measures for the German banking system, the German government declared that in the event of the functioning of the German Pfandbrief market being hampered, it would take measures to ensure payments on all outstanding Pfandbriefe. So the German government would cover potential losses on such exposures to European peripheral countries.
And secondly it has had a pronounced supply-demand mismatch:
Furthermore, we note that Pfandbrief spreads are strongly influenced by a pronounced supply and demand disequilibrium. As per December 2009, the amount of outstanding listed public sector Pfandbriefe dropped below €300bn to €296.5bn, a level last seen in December 1993 (Figure 2). At the same time, German investors are still showing an appetite for covered bonds, which is reflected by the fact that their share in primary Jumbo covered bond transactions has thus far remained at about 40% in 2010, despite the fact that year-to-date offerings from German issuers comprise only slightly more than 10% of total supply.
In summary:
We conclude that the exposure of some Pfandbriefbanks to peripheral euro area countries is pronounced in some cases. This, in our view, raises credit and rating concerns. However, we would not expect Pfandbrief spreads to reflect those concerns, as the strongly decreasing volume of outstanding Pfandbriefe has established a pronounced supply and demand disequilibrium.
So that’s possible bailouts and investor complacency demand keeping Pfandbriefe afloat then.
Excellent.
Related links:
Profiteering Pfandbriefe? – FT Alphaville
DO NOT DIZPUTE ZE SAFETY OF THE PFANDBRIEFE! – FT Alphaville
Covered bond bailouts – FT Alphaville
Next up for Europe, covered bond catastrophe – FT Alphaville