Coming home to the German market

  • 11 Sep 2006
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WestLB AG has led the way among Germany's Landesbanks in returning to the Pfandbrief market after the loss of their state guarantees. The Eu1.25bn 10 year bond in May was a successful beginning to WestLB's rebuilding of its yield curve in Pfandbriefe, in parallel to its presence in the Irish ACS market. Neil Day reports.

"One year on from the abolition of state guarantees for German public law banks, the creditworthiness of the Landesbanks and savings banks remains unscathed, as expected," declared Standard & Poor's (S&P), in a report on the sector in August.

The agency affirmed the ratings it had assigned to the banks before their historic loss of state guarantees in July 2005.

Although S&P's verdict was only in line with its expectations, it was nonetheless a welcome statement from what had, before the change, been regarded as one of the sector's harsher critics.

S&P's research carried the upbeat title: German Landesbanks' transformation on track to become more resilient.

On the funding side, the Landesbanks' activity in the new era has been, for the most part, low key, noted S&P. "The high level of issuance activity until July 2005 means that the need to raise unsecured debt has been low to date and will only increase over time," the agency said. "Furthermore, alternative and less rating-sensitive funding options, such as covered bonds or repo business — including that with savings banks — will remain available, even once the currently high level of market liquidity has abated and credit spreads increase to normalised levels."

The first high profile example of the new funding options that Landesbanks will increasingly use came at the end of May, when WestLB AG launched the only jumbo Pfandbrief so far from the sector. The Eu1.25bn 10 year deal, backed by public sector loans, was priced by ABN Amro, Citigroup, HVB and WestLB at 1bp over mid-swaps.

The deal was WestLB's first jumbo Pfandbrief in its current form. The bank lost its Pfandbrief licence when it split with NRW.Bank in 2002 and then issued asset covered securities through the Dublin-based WestLB Covered Bond Bank to finance its public sector lending (with Westdeutsche ImmobilienBank handling real estate finance).

WestLB AG held a roadshow in Europe and Asia before the issue, using the catchphrase "it's coming home" to grab investors' attention ahead of the Fifa World Cup in Germany this summer.

"The decision to issue jumbo Pfandbriefe was taken primarily because of the client focus of WestLB and the new strategy of the group," says Neil Colverd, member of the executive board of WestLB in London and chief executive for Asia. "This is to be the Sparkassen's window to the world, to be their major banker and to forge partnerships locally within the State of North Rhine Westphalia and then within Germany.

"The Pfandbrief law is the closest thing to those clients and returning to the market therefore makes sense within the context of providing them a full service in terms of assets and liabilities."

Colverd says that on the roadshow investors understood the bank's return to the Pfandbrief market. "There was a logical reason why we opened up the Covered Bond Bank in Ireland in the period after 2002 when we lost the Pfandbrief issuing privilege to NRW.Bank and could not issue in Germany," he says, "and why we are now returning to that market. And going forward there is a very logical reason for us to keep the ACS product open.

"Ireland, with its common law, specialised bank legislation provides a different type of product from the German on-balance sheet vehicle, and this also enables us to offer investors a choice of the two products. This message went down very well with investors."

Good demand in Asia

While German investors are typically more comfortable with their domestic Pfandbrief product and issuance under common law has been seen as a way of generating interest from areas such as the US and Asia, such generalisations did not prevent WestLB from selling more than 10% of its jumbo Pfandbrief into Asia, most of that in Japan. That bodes well for the bank's wider strategy.

"For us one of the great opportunities in the public finance world in the future is the 'trinity reforms' in Japan," says Colverd, who splits his time between Europe and Asia, "and how Japanese municipals will be moving towards a more US-style of refinancing model. Any institution that has strong roots in Asia, and particularly in Japan, and is willing to put in the time and effort will reap the rewards from these developments."

The trinity reforms are the Japanese government's programme of devolving fiscal responsibility from central to local government.

Having re-entered the Pfandbrief market, WestLB will now take a two-pronged approach to covered bond issuance, using both jurisdictions. "Initially the focus on jumbos will be through Germany, to build the yield curve," says Colverd. "We started at perhaps the most difficult end of the curve, but that was important to flag our return to the market."

However, this year WestLB has been most active in private placements. "All covered bond issuers have found the levels on offer through private placements extremely attractive," says Colverd.

While WestLB has been focusing on Germany, the Irish market has been enlarged by the arrival of Allied Irish Banks, which launched its first asset covered security in March, a Eu3.5bn two tranche deal.

"It's good to see the market grow," says Colverd. "Ireland doesn't have the domestic asset base of Germany, France or Spain, certainly on the mortgage side, but the market now has the critical mass that Luxembourg, for example, was not able to achieve."

  • 11 Sep 2006

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