Negative bond yields in Germany help support Pfandbrief enthusiasm

There were two notable Pfandbrief issues in Germany over the past couple of weeks, both at least twice oversubscribed by investors.

Firstly, German property financier DG Hyp placed its second mortgage Pfandbrief this year, a €500m benchmark issue with a 0.375% coupon and a 10-year maturity. The issue attracted 53 orders with a total volume of €1.1bn in the 50 minutes the order book was open, DG Hyp said in a statement. The Pfandbrief was given the highest AAA rating by Standard & Poor's.

In the final allocation, German investors received 60.8% of the issue, followed by investors from Scandinavia (12.2%), Asia (8%), Austria and Switzerland (5.8%) and other European and Middle East investors. About 45.6% was accounted for by banks, 30% by central banks and agencies, 19% by asset managers and 5.4% by insurers.

The placement was conducted by a consortium of banks, which included Commerzbank, Crédit Agricole, DZ Bank, Nord/LB, WGZ Bank and Bankhaus Lampe. The Hamburg-based DG Hyp is part of the co-operative banking network.

The second big issue saw German property financier Deutsche Hypo placed a €750m mortgage Pfandbrief with a 0.25% coupon and an eight-year maturity in its second benchmark issue this year. The order book was likewise twice oversubscribed.

In the 75 minutes that the order book was open, 70 orders were placed for a total volume of €1.5bn, said Deutsche Hypo. 79% of orders came from German investors, 6% from Benelux, 5% from Scandinavia, 2% from the UK and Ireland, 2% from France and 3% from other countries. “The impressively high demand for our second benchmark emission this year reflects investors’ trust in Deutsche Hypo,” said Board Member Andreas Pohl.

BayernLB, Natixis, Nord/LB and UniCredit acted as joint lead managers, ABN AMRO and Bankhaus Lampe as co-leads. The Hannover-based Deutsche Hypo, founded in 1872, is part of north German landesbank Nord/LB. With a €26.9bn balance sheet, it offers commercial financing in Germany, the UK, France, Benelux and Poland.

Meanwhile, the Association of German Pfandbrief Banks (vdp) has named Louis Hagen to be its new president. He is currently chairman of the management board at Münchener Hypothekenbank. He succeeds chairman of Berlin Hyp, Jan Bettink, who steps aside after nearly six years in the job, or three full terms.

Louis Hagen is a well-known quantity, having served as CEO of the vdp from 2001 to 2009, when he joined Münchener Hypothekenbank. He said his key priority would be "the regulatory requirements which the Pfandbrief banks face, and which are growing increasingly more stringent". In taking over the baton from his predecessor, he said, “Jan Bettink led the vdp skillfully in difficult times. Under his leadership the vdp gained 13 new members. The Pfandbrief Act was amended to make it more investor-oriented, and the appropriate privileged treatment of the Pfandbrief was at the heart of all regulatory initiatives.”

New members elected to the vdp's Board of Directors were Jürgen Fenk, board member at Helaba, Thomas Köntgen, deputy CEO of Deutsche Pfandbriefbank, and Frank Mühlbauer, chairman of WL-Bank.

Germany's Pfandbrief market has been experiencing somewhat of a renaissance since the start of the current building boom. Last year saw €58bn of Pfandbriefe issue, up from €46bn the prevous year.

Like German government bonds, the low interest rate on Pfandbriefe is a key issue for investors, although Pfandbrief traditionally command a premium of about 0.4% because of their lower liquidity. Although Pfandbriefe have been issue discreetly in the past with negative yields, a recent public issue by Berlin Hyp offering a negative interest rate caused headlines. As Bettink said at the time of the (oversubscribed) issue, "Investors have adapted to a market in which even many German government bonds are offering negative yields", and this had not stopped traditional buyers, including many Landesbanken, from buying the issue.

Bettink did, however, speak out against the readiness of the European Central Bank, as the biggest buyer of Pfandbriefe, to buy up almost any Pfandbrief that gets issued. "I consider these purchases basically wrong, and the Pfandbriefmarket just doesn't need them", he said.

While acknowledging that the ECB's willingness to buy made issuing Pfandbriefe easier, the effect of driving other potential buyers such as insurers into other asset categories was not so clear, he said, suggesting this might be a reason for the drop in liquidity in the market. It might be leading issuing banks to tailor their offering to the biggest investors, he suggested, instead of bringing out smaller Pfandbrief issues - but more often.