Jürgen Karcher, member of the board of directors,
responsible for group treasury and
How well has the market accepted and understood the split between the public sector and property parts of the old Depfa?
From October until mid-December 2001 we held quite an extensive roadshow to explain the split, because we felt it was important that people understood what we are doing. While in many industries consolidation is the major trend, it may seem an unusual step to come up with the idea of splitting up a bank.
But the roadshow succeeded in its aims and everyone felt comfortable with our concept. They understood the rationale very well, even if when it came to the technical details the plan for the split was a little more complex.
The way our bonds have performed over the past year, and especially in recent weeks and months, shows that investors have understood what we are doing and why, even if it is different to what other people are doing.
Has it been easy to proceed with your plan to launch new issues in your global covered bond programme under both German and Irish law, in terms of the regulatory situation and marketing the concept to investors?
The way things look at the moment, the dollar global that we are planning will be issued under German law.
We are at the same time setting up our Irish Pfandbrief bank and had thought that it would be possible to issue the new deal under Irish law. However, it took longer than expected for the rules and regulations to be finalised in Dublin. As we did not want to take any risks that we would have to cancel an Irish bond, we decided to be on the safe side and proceed with a German project.
Nevertheless, the Irish Pfandbrief is important for us because we have a large balance sheet in Ireland. For us, it is not a different product to what we have issued in the past, it is merely an additional, complementary one to the German product.
Irish regulations are clearly based on the German law, but in some areas they have been improved, particularly in the definition of the risks that you can take. We are therefore quite positive on the outlook for the Irish product.
For investors, the issuer is the same and I don't think that it should be a problem for them to accept the Irish product. It is a Depfa bond and everything that applied to our issues under German law will apply to the Irish product, in terms of market making, transparency, liquidity and the quality of the assets.
All these aspects are basically the same. It is only the regulation that is changing and, again, we feel that the regulation is very strong.
How will your issuance be split between the German and Irish products by volume?
Assuming that the Irish Pfandbrief is accepted in a similar way to the German one - ie so that there is only a minimal price difference - we have a lot of potential for issues out of Ireland, as we have roughly Eu40bn of pooled eligible assets in Dublin. We will not be moving any business from Germany to Ireland and we will continue to issue German Pfandbrief. But it is fair to say that the majority of our future activity will come out of Ireland.
How have the problems of the German Pfandbrief market affected you this year?
It is fair to say that they have affected us, although to a lesser extent than the other mortgage banks. There have been a lot of changes in the last 12-18 months and most of them were not necessarily positive. I think it is a difficult environment here in Germany, but that is another reason to feel very confident about the action we have taken.
We did the split to make sure that our senior debt rating stays at the double-A level to ensure that we can issue triple-A rated Pfandbriefe. Therefore we are no longer trying to present ourselves as a mortgage bank. We want to be seen as an agency for public sector lending, and we are trying to narrow the spread differential between ourselves and the state agencies and supranationals.
How important is the dollar market to you?
The US market is clearly the biggest in terms of the pools of money available. We felt that with our traditional euro product our success in the US was limited. So we hope that by coming with a US product we will really have the opportunity to broaden our investor base there.
This will give us more opportunities to really go for the cheapest funding.
The other area where we expect good demand is in Asia from central banks. For them, we as a Pfandbrief issuer are well known. Most of them are familiar with our euro product and we expect quite positive feedback from this region because most of their currency reserves are dollar-based, so it should be a natural fit.
Why do you think that the dollar market was a relatively untapped source of funding for the mortgage banks in the past?
It is worth remembering how things were a few years ago. Even though the market has been struggling a bit in the past 12-18 months, looking over the past four to five years, I must say that the success of the Pfandbrief market has been enormous.
So nobody was really thinking about diversification and moving into other markets, because everything was functioning very well.
Now, with the changes we have had in the market, with the fall in some mortgage banks' senior ratings and of their public sector Pfandbriefe from triple-A, it is difficult to go for a new investor base.
But we are in a much better situation. We are confident in our double-A senior rating so we can guarantee a triple-A product.
Is there anything else that has been important for you this year?
One achievement for us has been the decision to list our bonds on EuroMTS, alongside KfW, the EIB and Freddie Mac. This means moving away from the EuroCredit MTS platform that the mortgage banks are listed on.
The Pfandbrief started off as a homogeneous triple-A product, but has become a credit market. And people have seen the difference in liquidity between the negotiated and transparent benchmarks that we issue and deals that are issued at Eu1bn and then gradually increased to Eu3bn.
Depfa's bonds have always been the most actively traded on EuroCredit MTS, sometimes making up 50% of turnover, so it is obvious that the liquidity in our bonds is completely different to that of other issuers.
Therefore it was clear that our Aaa/AAA/AAA product can offer the same liquidity to investors as the likes of KfW, Freddie Mac and the EIB.