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The German Pfandbrief Market 2015 | 2016 10 Years of Germany’S Pfandbrief Act – Laying the Groundwork for a Successful Future

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The German Pfandbrief Market 2015 | 2016 10 Years of Germany’S Pfandbrief Act – Laying the Groundwork for a Successful Future The German Pfandbrief markeT 2015 | 2016 10 years of Germany’s Pfandbrief acT – layinG The Groundwork for a successful fuTure a research PublicaTion by dG HYP | september 2015 The German Pfandbrief Market 2015 | 2016 1 The German Pfandbrief Market 2015 | 2016 Table of ConTenTs Preface ____________________________________________________________________ 2 Executive Summary _________________________________________________________ 3 Current Market Developments ______________________________________________ 4 Rating News _______________________________________________________________ 13 Legal Framework ___________________________________________________________ 16 Pfandbrief licence required ___________________________________________ 16 General cover requirements and maturity-matching rules _______________ 18 Preferential right of pfandbrief creditor and insolvency-proof trust _____ 22 Special requirements for ordinary cover assets for each pfandbrief type 25 Transparency regulations applying to quarterly reports ________________ 33 Independent monitoring by cover pool monitor ________________________ 37 Special supervision by BaFin __________________________________________ 37 Administrator of a pfandbrief bank with limited business activities _____ 38 Residual legal risks following the insolvency of a pfandbrief bank _______ 42 Our assessment ______________________________________________________ 44 Regulatory treatment of german pfandbriefe ________________________________ 45 Imprint ____________________________________________________________________ 47 Disclaimer __________________________________________________________________ 48 DG HYP offices _____________________________________________________________ 49 1 The German Pfandbrief Market 2015 | 2016 The German Pfandbrief Market 2015 | 2016 prefaCe in comparison to other european investment vehicles, the German Pfandbrief is very solid and stable in value, an investment that meets investors’ needs for security and transparency – even in troubled capital market phases. investors – both in Germany and abroad – appreciate the outstanding credit quality and stable yields provided by Pfandbrief issues. licensed as a Pfandbrief issuer by the German federal financial supervisory authority (bafin), dG HYP uses Pfandbriefe to refinance loans collateralised by liens on real property, as well as public finance exposures. moreover, dG HYP has access to a strong funding base, thanks to its integration in the Volksbanken / raiffeisenbanken cooperative financial network. one of the reasons for the high quality of the German Pfandbrief is its legal basis. Ten years ago, the German Pfandbrief act became law. it has since been amended and improved multiple times, further contributing to the high quality of the investment. The German government has been quick to react to new developments, and provides a solid set of rules for all to adhere to. This makes the Pfandbrief one of the safest investments there is, as affirmed by thee uropean banking authority. in a report published in July 2014, EBA com- pared various european covered bond legislations: it considered the German legal frame- work to be best practice in many aspects. after a slight decrease in gross issuance across all Pfandbrief types in 2014 when compared to the previous year, new issuance rose markedly in the first six months of 2015, with ­Mortgage Pfandbriefe again contributing the highest volumes. This trend is expected to continue, given the continued positive development of commercial real estate markets, helping mortgage Pfandbriefe to expand their market share during the current year. The present report on the German Pfandbrief market 2015/2016 provides an overview of current developments in the Pfandbrief market and the effects of the european central bank’s covered bond purchase programme on the Pfandbrief market. it also addresses the impact of the new ratings applied by the three largest agencies, and details the legal basis of the German Pfandbrief. Deutsche Genossenschaft-Hypothekenbank AG september 2015 2 3 The German Pfandbrief Market 2015 | 2016 The German Pfandbrief Market 2015 | 2016 EXECUTIVE SUMMARY » The yields of pfandbriefe are at a low level, even though they have now picked Low yield leads to strange credit up again from their lows of April 2015. Low yields are also influencing the swap curve pattern spreads of pfandbriefe. All in all, the credit curve for the pfandbrief market is currently very flat, looked at as a whole. The curve is even slightly inverse in the two to five-year maturity segment. Only with maturities of over five years does the credit curve return to normal, i.e. with increasing swap spreads for longer maturities. Figuratively speaking, the pfandbrief credit curve has pulled its belly in. Overall, the low interest rate level led to a strange situation in mid-2015, namely the fact that short pfandbriefe were quite expensive in relation to the ab- solute yield level, but that their swap spreads were quite cheap compared with pfandbriefe with longer maturities. » In our view, the swap spreads of German pfandbriefe are undoubtedly benefit- European Central Bank crowding out ing from the European Central Bank's (ECB) current covered bond purchase private investors, but pfandbrief programme. Yields and swap spreads are lower at present than they would be banks have support of loyal investor without the ECB's massive intervention. Consequently, however, the central base bank is also crowding out private investors. The purchase programme could come to an end after September 2016. Depending on the state of the market in one years time, and all else being equal, the swap spreads of covered bonds are then likely to widen again in view of the non-recurrence of the less price- sensitive demand from the central bank. As things stand at present, pfandbrief swap spreads are likely to have suffered least from this in an international com- parison with other covered bond segments. Firstly, the swap spreads of pfand- briefe have so far benefited less from demand on the part of the ECB. Secondly, pfandbrief banks can count on a very loyal domestic investor base. » The huge importance of pfandbriefe for the German capital market and not least International institutions have great their sophisticated legal framework are regularly cited by all the rating agencies regard for the quality of the Pfand- as a major support factor for the ratings of pfandbriefe. The Pfandbrief Act has brief Act been enhanced and improved several times in the last ten years. This is another hallmark of German pfandbriefe, illustrating the fact that the legislator is quick to respond to current developments and translate these into generally binding standards to match. The Pfandbrief Act also offers pfandbrief creditors a high degree of protection by international standards. The pfandbrief is therefore cur- rently one of the safest possible types of financial investment. The European Banking Authority published an extensive report on European covered bond leg- islation in July 2014 with detailed comparisons. The regulations in the German Pfandbrief Act are described as proven and a model of their kind (best practice) in many of the eight assessment categories and sub-points. In an international context, we are generally in favour of variety when it comes to covered bond legislation; this gives national legislators sufficient scope for specific regulations which are suitable for their respective country. We are not at all in favour of ad- justing covered bond legislation in Europe to the smallest common (quality) denominator. 2 3 The German Pfandbrief Market 2015 | 2016 The German Pfandbrief Market 2015 | 2016 CURRENT MARKET DEVELOPMENTS The yields of pfandbriefe are at a low level even though they have already picked up Yields at a low level again significantly since the low of April 2015. The covered bonds of the pfandbrief banks have therefore followed the general trend on the German bond market which saw a gradual dwindling in yields from the second half of 2013 to April 2015, led by Bunds. In April 2015, the Bund Future reached an all-time high of 160.32 points (closing price). As a mirror image of this, the yield of ten-year German Bunds tempo- rarily fell to 8 basis points before rising again by 90 basis points within just a few weeks to just under 1 percent at the beginning of June 2015. PFANDBRIEF YIELD CURVE STEEPER AGAIN SINCE APRIL 2015 ON RISE IN YIELDS AT THE LONG END OF THE CURVE GENERIC YIELDS AS PERCENT 4,5% 4,0% 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% 02/10 08/10 02/11 08/11 02/12 08/12 02/13 08/13 02/14 08/14 02/15 08/15 2 years 5 years 10 years Source: Bloomberg, calculations and presentation DZ BANK Research The surge in yields at the end of April/beginning of May was probably influenced by Many reasons behind surge in yields many factors. The debate about Greece's solvency was an important factor. To at the end of April /beginning of May some extent, the rollercoaster ride of yields in the last few months was very much dependent on how market participants perceived and assessed the news flow on the issue at that particular moment. However, it is likely that the very high volatility of yields in May 2015 which went hand-in-hand with unprecedented price fluctuations on single trading days was driven by other developments. At the end of April, the in- flation figures of a number of German Länder meant that the threat of deflation was perceived by market participants as lower. Consequently, the need for
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