Interest in Pfandbriefe surges to 2011 levels; rise in interest rates is putting them back in the spotlight
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Earlier this month, Berlin Hyp issued its third mortgage Pfandbrief of the year, marking the first time it has done so without the participation of the ECB since October 2014, under the Covered Bond Purchase Programme 3 (CBPP 3).
The five-year bond with a volume of €750 million carries an interest coupon of 3.375% and is rated Aaa by Moody's rating agency. The yield at Reoffer was 3.382%. In total, 53 investors participated in the Pfandbrief. The majority of the bond - 76% - was placed in Germany. Outside Germany, investors from Asia and Austria/Switzerland showed interest with around 7% each. Banks formed the largest investor group with 72%, followed by central banks and public institutions (17%) and funds (10%). Savings banks and affiliated companies accounted for 31% of the issue.
‘We are very pleased to have successfully placed our mortgage Pfandbrief on the capital market despite the current volatile interest rate environment,’ said Teresa Dreo-Tempsch, who is responsible for capital market business on the management board of Berlin Hyp. ‘We see this as renewed proof of confidence in Berlin Hyp and in the Pfandbrief product.’
The lender is becoming something of a trailblazer. In May last year, it became the first European bank to have issued in green, social and sustainability-linked formats with the launch of a €750 million 10-year mortgage Pfandbrief supporting affordable housing, and the bank plans to be equally active in the social market as it is in green bonds.
Berlin Hyp most active European bank issuer of green bonds
Since its launch of the first Green Pfandbrief in 2015, Berlin Hyp has become the most active European bank issuer of green bonds. In April 2021, it also became the first lender to issue a sustainability-linked bond (SLB). Bodo Winkler-Viti, head of funding and investor relations at Berlin Hyp, said at the time: ‘The big issue of our time is affordable housing. We can see this very clearly in Berlin, where more and more people - not only the lowest incomes classes, but also lower-middle income classes - cannot afford to pay rents in the city anymore, but have to move further way. This exacerbates social segregation, which is not at all beneficial to society.’
Other lenders are starting to take a similar approach. In January, DZ HYP successfully placed two green benchmark bonds on the market as part of a dual tranche. The proceeds raised will be used to finance sustainable real estate in Germany in a targeted manner. The transaction was supported by a syndicate consisting of Crédit Agricole, Danske Bank, DZ BANK, Intesa Sanpaolo, Nord LB and UniCredit.
‘In the past year, we have increasingly dedicated ourselves to sustainable real estate financing,’ said Dr. Georg Reutter, chairman of the management board of DZ HYP. ‘The success of our Green Dual Tranche proves that investors appreciate our commitment and entrust us with their money for a sustainable transformation of the real estate sector. This encourages us to continue on our chosen path.’
Following the announcement of the transaction, the order book was offered with a spread for the three-year tranche of +1 basis point and +16 basis points for the ten-year over swap mid. Due to brisk and steady investor demand, both books grew to over €5.3 billion. Final spreads were set at -4 basis points for three years and +13 basis points for ten years due to the strong oversubscription of both tranches. The coupon on both bonds is 3%. ESG investors contributed to the success of this transaction with an average share of 45%, according to DZ Hyp. The largest share of investors came from Germany, at around 68%. Demand was also strong from the Benelux countries, which accounted for 13%. In addition, investors from Austria and Switzerland, among others, participated with a combined 8% and from Scandinavia with 5%.
Pfandbriefe have often been considered old-fashioned and complicated but the rise in interest rates is putting them back in the spotlight as a high-yield alternative to federal bonds. And they have been around for a long time, dating back to 1769 when Prussian manor owners were short of cash due to the high cost of war. Thus, the Pfandbrief was born, whereby such owners could borrow money from the community of large landowners (the so-called Landschaft). They, in turn, procured the money by reselling the claim against the manor owner in the form of a mortgage bond. The buyer then had a claim against the Landschaft. In the event that the latter could not pay, the individual manor owner could be held liable.
Münchener Hypothekenbank places jumbo €1 billion mortgage Pfandbrief
Today, in a further sign that demand for bonds is strong and that investors are looking for somewhere safe to park their capital, Münchener Hypothekenbank's first large-volume Pfandbrief issue in January 2023 was exceptionally strong. The jumbo-sized €1 billion mortgage Pfandbrief was oversubscribed shortly after the order book opened. After around 1.5 hours, the order book was closed at a volume of €3.5 billion.
The strong demand was also reflected in the spread. The final issue was launched at -9 basis points below mid-swap. The Pfandbrief has a maturity of 2 years and 8 months. The coupon is 2.75%.
‘The enormous investor interest and the very good price underline the standing of Münchener Hypothekenbank's Pfandbriefe in the market and our quality standards as an issuer,’ said Dr. Holger Horn, chairman of the management board of Münchener Hypothekenbank.
A total of 135 orders were placed from 15 countries. The regional focus with 75% of the issuance volume was Germany, followed by investors from Southern Europe (7%) and Benelux (6%). The largest investor groups were banks with 52% of the issuance volume as well as asset managers with 26% and central banks and official institutions with 19%. The transaction was lead managed by Barclays, Crédit Agricole, DekaBank, DZ BANK, LBBW and UniCredit.
However, despite the fresh interest in Pfandbriefe, that’s not to say that the market isn’t shifting. While government bonds have held up well relative to other interest-rate securities over the last year, the ECB is tending to reduce its holdings of these securities and some lenders such as DZ Bank expect the ECB to buy fewer Pfandbriefe going forward.
Nonetheless, demand remains high. The Association of German Pfandbrief Banks registered issues worth around €15 billion between January and the end of February this year, a level that was last recorded in 2011, with the focus on maturities of three to five years at 46%, compared with five to seven years at 39% in 2022.