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."
