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FIGCovered Bonds

Crisis Talk — with Juergen Klebe, head of funding and investor relations at Deutsche Hypo

German CMBS

Deutsche Hypo took advantage of the public Pfandbrief market before the coronavirus crisis struck and since then has been busy issuing privately placed senior deals. Spreads have since tightened, which should help issuance bounce back. But ready access to favourable European Central Bank repo funding means supply will be restricted. Some parts of the German commercial real estate market are likely to be facing trouble too, but even so, Pfandbrief investors are well protected.

GlobalCapital: How has your funding changed since March 1?

Jeurgen Klebe, D Hyp: In February we issued a €500m seven year Pfandbrief at 3bp over mid-swaps but that deal was not really pre-funding, though clearly in hindsight, we were lucky to have chosen that time to bring a benchmark. 

Since then we’ve not issued a Pfandbrief but we have issued a lot of senior preferred deals, all in private placement format in two to five year maturities. These deals, of €1m-€50m, are issued on a dayily basis and bought by a wide mix of local communities, public institutions, smaller savings banks and funds. We’ve also been busy with money market funding.

Moody’s recently published a report suggesting Pfandbrief issuers were obliged to issue senior unsecured as Pfandbriefe can only fund up to a 40% loan to value ratio because of its restrictive mortgage lending limit. Does this explain the lack of Pfandbrief issuance since March?

Talking about the Moody’s research piece as of April, I would see the development from a different angle, although their estimation of 40% LTV ratio calculated in market price terms might on average be right. 

The Pfandbrief Act defines that 60% of the conservatively determined long term Mortgage Lending Value — in contrast to a possibly more volatile market value — can be funded by Pfandbriefe and the remaining 40% has to be funded by senior unsecured. So nothing has changed from a legal point of view. 

This is the key safety feature of Pfandbriefe. Most issuers act very cautiously — even more than before. So the commercial real estate investor has to bring more of its own equity into a transaction. 

As our average LTV on Mortgage Lending Value — and not only ours — is in the low fifties, the quite stable LTV ratio has only limited meaning for our senior funding. I think issuers — and investors as well — are puzzled by the corona crisis and are uncertain where Pfandbriefe should be priced.

Investors are tending to be very cautious and demanding much higher spreads which means issuers have shied away from the Pfandbrief market as they had the other option, which for them is the [ECB's Targeted Longer-Term Refinancing Operations (TLTRO)]. 

The ECB has made TLTRO funding very attractive so that’s why you have seen this shift away from Pfandbriefe and into the TLTRO, with the balance of funding moving to the senior preferred. But more lately we’ve seen spreads shrinking, the corona infection rate has peaked, so you may, in due course, see some issuers return to the market with their premium product, the Pfandbrief. So the higher issuance of senior unsecured is — from my point of view at least — just temporary.

How helpful are recent measures announced by the ECB?

Of course these are helpful. With the Corona crisis in mind the ECB has provided ready access to cheap liquidity without question.  On the other hand the three year TLTRO maturity is limited and the purchase programme has crowded out standard investors. We have to have in mind that there will be a world after the crisis which means we all need to be able to access these investors and issue longer term funding.

How has your balance sheet changed in the first quarter?

New business has been slower as commercial real estate clients are re-evaluating their business lines, which means new business has been shrinking slightly. The first quarter won’t be a period of balance sheet growth, that’s for sure.

What does this means in terms of risk-weighted asset (RWA) growth?

Risk weighted assets will not have grown from a volume perspective but as we will need to re-evaluate the loan portfolio under the internal rating based approach there may be RWA growth, but it’s too early to say. The effect of the internal rerating of these loan assets is likely to be fairly limited — but again, it is still too early to say.

Do you have any visibility on how deferred loan payments and non-performing loans are likely to evolve?

There are some of our clients’ business lines that are likely to be affected more than others. As all hotels are empty and are not bringing in revenue those clients are asking for a payment deferral but so far the volume has been very limited which, in terms of millions of euros, is in the low double digit area due to deferrals of interest and redemptions. 

We have followed a risk-averse long-term strategy since the global financial crisis. But, in the event that the tail of the corona crisis stretches out for two years then it’s likely that the effect would be higher.

What have national regulators and supervisors done to help alleviate these problems?  

The regulator has helped with the guidance on how figures should be reported and though that doesn’t exactly give help the actual problem, it does smooth the process.

Do you think Pfandbrief investors are going to be affected by payment deferrals?

A renegotiated loan is not the same as one that is overdue. Under the Pfandbrief Act loans that are past due need to be removed from the cover pool. In that respect the law is very strict. 

This is a good feature in German law, which should stay as it is. So far renegotiated loans have been really limited and the effect on the cover pool has been close to zero. With the above mentioned regulation the effect for Pfandbrief investors is absolutely zero.

Do you expect to issue more or less Pfandbriefe and how much impact does the loan side have on your 2020 program?

Issuance towards standard investors is likely to be reduced due to the ECB’s TLTRO but our new business is stable with loan origination in 2019 being roughly the same as 2018 which is around €3bn a year.

Have there been any major challenges while from working from home? 

We have a shift system in the office which means I work from home every fortnight. The challenge has been largely technically related and limited to the initial transition to home working. In my case there was just one day of nearly zero online performance. That really got on my nerves but the problem was limited. 

Of course I miss the office talk and although chatting is sometimes useless talk, it somehow leads to new ideas from time to time. Work is dominated by teleconferencing which means discipline in talks is higher than before as people can’t interrupt so easily, so that is a good side effect.

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