Since losing their state guarantees in 2005, Germany's Landesbanks have been exploring a variety of funding strategies, secure in the knowledge that they had stockpiled plenty of cash in advance. The jumbo Pfandbrief market has been a favoured method, offering competitive funding costs. However, private placements are cheaper still and are becoming more popular. Meanwhile, covered bonds backed by local savings bank mortgages could find a route to market via Luxembourg. Neil Day reports.
It is perhaps a sign of the times that the largest unsecured bond issue from a German Landesbank this year was a mere Eu300m transaction. But while that might be easy to read as a sign of weakness, it is more a reflection of the comfortable position that the sector finds itself in from a funding point of view.
Before losing their state guarantees in July 2005, the Landesbanks engaged in heavy prefunding, knowing that they would henceforward have to raise finance in a more competitive environment.
Now, with these reserves in place, the Landesbanks have been able to pick and choose their opportunities.
The most notable, and most publicised, development in their funding strategies has been their growing activity in the Pfandbrief market, where they can achieve funding costs close to where they could raise unsecured funding with the benefit of their guarantees. The bulk of this has been with Pfandbriefe backed by public sector loans.
Bayerische Landesbank, for example, has launched two jumbo Pfandbriefe this year. It sold a Eu1.5bn four year deal via BayernLB, BNP Paribas and Citigroup in March and then a Eu1bn two year issue in early November, through Barclays Capital, BayernLB and Deutsche Bank.
On its four year issue BayernLB achieved an impressive re-offer margin of 4bp through mid-swaps and in July Landesbank Baden-Württemberg scored the tightest ever pricing on a jumbo Pfandbrief, when HSBC, Ixis CIB and LBBW sold its Eu1.25bn five year deal at 5bp through mid-swaps.
However, even such attractive jumbo levels have been beatable elsewhere. "We want to continue to issue benchmark transactions but we do not rely on them," says Peter Kammerer, head of international funding and investor relations at LBBW in Stuttgart. "They are useful for marketing reasons and to meet the needs of investors who have a requirement for liquid products.
"But the bulk of LBBW's funding is done through private placements, be that in MTN or Schuldschein format. That said, our funding needs have been lower this year so we have also been less active on the private placement side."
Landesbank Hessen-Thüringen (Helaba) has found itself in a similarly comfortable position. "We did consider issuing a jumbo Pfandbrief before the end of the year," said a spokesperson for Helaba, which has yet to issue one since losing its guarantees. "However, we have been funding ourselves through private placements at very attractive levels and in amounts that made a jumbo unnecessary.
"It was a hard decision to take, as jumbo Pfandbriefe are useful for other reasons, such as investor relations and maintaining the bank's profile in the market, but we just didn't have room for it."
Helaba has raised some Eu8bn this year, compared to almost Eu10bn in 2005. "The bank's business has developed very positively and, as in the past two to three years, we have adjusted our funding target upwards to accommodate this trend," says the Heleba spokesperson.
Within this funding requirement, Helaba did find room to launch the largest unsecured issue for a Landesbank since the sector lost its guarantees (excluding the large number of 18-24 month issues, mainly floating rate notes, that have been launched).
This was a Eu300m 4.875% 10 year domestic Genußschein, launched by Deutsche Bank and Helaba in mid-October.
While the size of the upper tier two capital transaction might not be large by international standards, it is the first Genußschein since 2001 and is bigger than normal for such an issue.
The achievement was all the more impressive since Allgemeine HypothekenBank Rheinboden had called on its Genußschein holders to help it recover from the brink of bankruptcy in late 2005.
Given these circumstances, the leads went out with a Eu150m minimum issue and a target size of around Eu250m, but they were able to double the size after some Eu400m of orders were placed in the first 24 hours of bookbuilding. They tightened guidance from 80bp-85bp over mid-swaps to 80bp-82bp over, before pricing the deal at 81bp over.
Moody's rated the instrument A1, two notches below Helaba's Aa2 senior long term debt rating, with a negative outlook. Standard & Poor's and Fitch rate the Sparkassen-Finanzgruppe Hessen-Thüringen (S-Group), which includes Helaba and the region's savings banks, A+ and A, respectively.
The loss of the Landesbanks' state guarantees was expected to prompt them to issue Pfandbriefe secured on the mortgages of their local savings banks.
In the past, Landesbanks issued public sector Pfandbriefe backed by loans to savings banks, but these loans now no longer qualify as public sector collateral in Germany — hence the efforts to use savings banks' mortgages as collateral instead.
However, while interesting in theory, this idea has proven more complicated than expected to implement. While some Landesbanks have begun to pool mortages, they have not issued Pfandbriefe.
Instead, there has been growing interest from Landesbanks in issuing through their Luxembourg subsidiaries. In Luxembourg, loans to Germany's savings banks still qualify as public sector collateral, so a German Landesbank could use such loans as collateral for lettres de gage publiques.
NordLB is widely expected to be the first to do this, but this summer LBBW also indicated it might do so, through its subsidiary Landesbank Rheinland-Pfalz International Luxembourg.