Europe's largest economy is the big prize for securitisation
bankers. But in 1997 German institutions accounted for just 0.1% of
European asset backed bonds. Germany's efficient and stable
financial system leaves few gaps which cry out for securitisation -
but the gates are beginning to open.
Germany's bank regulator published a framework for bank
securitisations in 1997, stating that the technique was "in the
interest of Germany as a financial centre" -- and this year
Deutsche Bank led the way, launching the first mortgage backed
security for three years.
Asset backed commercial paper conduits sponsored by German banks
are proliferating, to meet the corporate sector's demand for cheap,
off balance sheet funding.
As monetary union approaches, banks and companies are finding their
shareholders increasingly more demanding, and in their quest for
improved returns, they are turning to securitisation.
GERMANY HAS DM1.9TR OF MORTGAGES, thousands of banks, and some
of the world's most powerful and sophisticated industrial and
service corporations. It also boasts one of the leading financial
centres in Europe, and several home grown investment banks with
considerable experience of securitisation elsewhere in Europe and
in the US. So why has securitisation been so slow to develop?
The answer is at least in part a negative one - there has been no particular reason for it to develop. In most countries, securitisation takes off after a kickstart. In the US, the collapse of the savings and loan industry led to the institutionalisation of mortgage backed securities, while rapid growth in consumer credit produced ever growing volumes of ABS.
The UK's financial services industry has been deregulated and changed radically, and privatisation has generated a steady stream of high profile structured financings. French banks and property companies have been through painful times in the 1990s, and Japan is now in the throes of an acute credit crisis.
Germany, Europe's paragon economy for decades, has staggered under the cost of reunification, but the structure of the financial and corporate sectors has hardly changed. The country is a byword for stability - in corporate ownership, banking practice and banking relationships.
"The German banking system is built on relationships," says Detlef Scholz, a senior structured finance analyst at Moody's in London. "Private and corporate clients tend to stay with one bank, and there has not been the rapid disintermediation that we've seen elsewhere in Europe. Securitisation can be seen as involving a split in that relationship - and if you're introducing any new product you have to convince a lot of people in the institution."
Caution about disturbing relationships and privacy, as well as about impairing the creditworthiness of banks, infuses the circular on securitisation issued by the Bundesaufsichtsamt für das Kreditwesen (BaK) in May 1997.
The guidelines forbid banks to cherry pick assets for securitisation, subsidise a transaction once it is launched, or substitute assets in the portfolio. The requirement to notify obligors that loans are being transferred is waived, provided that the seller continues to service the portfolio, and the obligors' identity is not revealed to any third party - even a rating agency.
German banks have welcomed the document, which allows regulatory capital relief for securitisations without specific approval, provided the guidelines are followed. "I am very bullish for securitisation," says Marco Schütze, an official in Bankgesellschaft Berlin's structured finance group. "Now that the BaK has agreed that securitisation is normal, everyone wants to do it. I expect a lot of issues in the next few months, with corporate loans or mortgages."
REGULATORY ENCOURAGEMENT MAY have come at just the right time for Germany. "The big German investment institutions are under pressure to improve returns, so as shareholders they are becoming more and more activist," says Schütze. "The banks' awareness of return on equity and regulatory capital is increasing rapidly, and they are all trying to improve their balance sheet management."
When Deutsche Bank launched its DM1.4bn mortgage securitisation in May, group treasurer Detlef Bindert told Euroweek: "Our target is to achieve a 25% return on regulatory capital by 2001. This transaction frees up about DM110m of capital, but it also signals a change in corporate culture - from now on, when we originate assets, we will be thinking about ways to maximise returns, including selling loans to the market." For securitisation in Germany, US-style shareholder value looks likely to be the kickstart.
Since the German credit card market is relatively small, and borrowers usually repay their balances monthly, banks and finance companies looking to shift assets off balance sheet are likely to focus on auto loans, mortgages and corporate loans.
Until Deutsche's jumbo mortgage deal, car finance had been the mainstay of the German ABS market. Volkswagen Bank/Leasing, Europe's largest auto lessor, worked for six years to overcome tax problems and achieve a true sale of its assets - in 1996 Deutsche Morgan Grenfell and CSFB launched two DM500m deals for the issuer.
And BGB has arranged a DM200m securitisation programme for ABC Bank, backed by car, caravan and motorcycle loans and funded in the syndicated loan market. The DM50m opening tranche, German Car Loans No 1, emerged in June 1997 - the first securitisation to take advantage of the BaK guidelines. BGB intends to underwrite GCL 2 at a similar size before the end of June this year.
Car finance is a big industry in Germany - according to Duff & Phelps, the outstanding volume of loans stood at DM46bn in 1995. Most of the players are large, and many are owned by auto manufacturers which have used securitisation in the US.
The German mortgage market presents a far more complex challenge to asset backed bankers. The market epitomises the security and durability of German finance. Buying a home is more expensive than renting, homeownership is only 41% and most Germans who buy a property do so once they are aged over 30 and ready to settle in one place for life.
The range of institutions offering mortgages is extremely diverse - 45% of loans are extended by small local savings banks and cooperative banks, which are financed very cheaply by state owned regional banks. The larger lenders include the Hypothekenbanks (mortgage banks) and commercial banks. Consumer choices are still largely determined by relationships.
The existence of the Pfandbrief market is not a serious obstacle to securitisation. Only Hypothekenbanks can issue Pfandbriefe, and their market share is less than 19%. Furthermore, many mortgages have loan to value ratios greater than 60%, and only the first 60% is eligible for Pfandbrief refinancing.
It was a Hypothekenbank which launched the first German mortgage backed security, spurring the BaK to look seriously at securitisation. JP Morgan lead managed the DM522.6m GEMS deal for Rheinische Hypothekenbank in 1995.
When German reunification sparked a property boom, many mortgage banks ran up against legal limits on lending over the 60% loan to value ratio. Rheinhyp chose to shift mortgages off balance sheet rather than stop originating.
The German parliament, the Bundestag, quickly eased the regulations, and as the boom waned, the Hypothekenbanks lost interest in securitisation.
But that motivation could be returning. BGB is preparing a commercial mortgage deal for a Hypothekenbank, which could be funded in the bond, loan or CP market.
"The Hypothekenbanks are facing increased competition from commercial banks and they are anxious to expand," says Jürgen Haferkorn, associate director at Duff & Phelps in London. "But they cannot get regulatory capital relief from issuing Pfandbriefe, and with European harmonisation risk weightings are likely to go up - the weighting for commercial mortgages is going to rise from 50% to 100% in 2001."
In the short term, however, commercial banks are the most likely to securitise mortgages. They have the fastest growing market share, now 16.3%, but are keen to minimise asset growth. "The commercial banks have large portfolios and good regional diversification," says Haferkorn.
"They are competing very fiercely in the mortgage market because the returns are good, and securitisation could eventually give them the same long term cheap funding advantage that Hypothekenbanks get from Pfandbriefe."
Bank treasurers in Germany are also eyeing their corporate loan books. Deutsche announced it was working on a CLO last year, but Dresdner got there first, launching a DM2bn deal in May.
A senior official at one German bank said: "There is a huge potential for CLOs from the 10 or 15 biggest banks, and we have some ideas for a deal, but we are well capitalised at the moment and would only go ahead if a CLO could give us attractive funding as well as freeing up capital. When the spreads come down to single digits over Libor we'll be tempted."
Fabio Salvalaggio, head of securitisation at Commerzbank in London, believes CLO issuance will develop slowly. "The rating agencies have hardly begun to penetrate Germany, so a bank which wanted to do a CLO would have to persuade the agencies to accept its internal credit scoring system, which might be an arduous process."
NatWest managed to persuade the rating agencies to accept its internal credit scoring system for the Rose transactions, but had the benefit of a pool with many rated entities, allowing the agencies a standard against which to benchmark."
WHILE TERM SECURITISATIONS ARE STILL extremely rare in Germany, the asset backed commercial paper market is fizzing. In 1997 Deutsche Bank launched a new multi-seller conduit, Rheingold, which is similar to its existing Rhein Main vehicle, but which can issue in euros. WestLB set up its Compass programme, and Bayerische Vereinsbank increased the volume of its Bavaria Securitisation conduit.
"German banks and corporates are using the conduits as a quick, cheap and easy route to off balance sheet finance," says Detlef Scholz at Moody's. "Compared to a bond, there is a lot less legal work involved, you don't have to disclose yourself to the whole market, and you can start with a much smaller portfolio. The German conduits are getting bigger and more diverse all the time."
Moody's reported in March that 15 German domiciled institutions were contributing more than DM4.5bn to German sponsored programmes alone. Mortgages and car loans predominated, but the assets included employee loans, credit cards and trade receivables.
The growth of the commercial paper market provides the clearest signal that German treasurers are turning to securitisation as a means of improving return on equity and raising cheap capital.
"The market will develop slowly," says Salvalaggio at Commerzbank. "In particular, many of the corporates will wait for the banks to break the ice before they take the plunge into securitisation.
"But shareholder value is very important now, and if you look two years ahead, Germany may be the European country with the biggest potential appetite for securitisation."