The Coming of Covered Bonds

As the RMBS market begins to slowly spring back to life, an effort to establish a stronger presence for covered bonds in the minds of US traders and investors continues nonetheless. Even though financial reform stole a bit of the thunder from covered bond proponents, it didn’t take any of the momentum. And while covered bonds is an issue picking up in the trade press, no one covering the mortgage origination angle has taken the time to sit down with the German pioneers of covered bonds to see what they think of the pending legislation. Until now. Jens Tolckmitt is the executive director of the Association of German Pfandbrief Banks. The Pfandbrief is the German uber-covered bond platform; a blueprint for doing strong, if expensive, structured finance. Centuries old, and without ever defaulting, Pfandbrief has come a long way from placing investor advertisements in the back of periodicals. Today, the opportunity is knocking at our door, Tolckmitt says, who suggests we follow in the path of Pfandbrief. And considering the performance of the platform through the lat few years, he just might be right. HousingWire caught up with Tolckmitt at his base of operations in Berlin, in order to get his expert opinion on the state of covered bonds in the United States. HousingWire: Jens, thanks for your time, things are moving forward in a way they haven’t before. There is a lot of momentum in the States for covered bonds. Canadian Imperial Bank of Commerce, CIBC, recently put out a US dollar-denominated benchmark covered bond, for example. Jens Tolckmitt: Actually, the CIBC covered bond issuance occurred during my last visit to the U.S. at the end of January 2010. It got a lot of attention during a panel discussion we co-organized in Washington as well as during a panel I joined during the American Securitization Forum’s conference in DC. HW: The best benchmark for comparison is, of course, the Pfandbrief, which is the original and most successful. Can you update us on the performance of the Pfandbrief? Jens Tolckmitt: The Pfandbrief has performed very well. Spreads are now almost back to normal and have returned to pre-crisis levels. The Pfandbrief is the only European covered bond that has experienced this type of spread tightening until end October and beginning of November 2009. Since then spreads have continued to narrow but at a decreased speed because levels were already pretty low. And: the European covered bond market is now witnessing a persistent spread differentiation. Pfandbrief issuers clearly were able to issue throughout the crisis and issuance volumes during the crisis were quite remarkable. Immediately after Lehman, banks were able to place issuance of 10 to 14 billion Euros ($13.3 to $18.6 billion) per month in the capital markets during the time between September and December 2008. Pfandbriefe and many other covered bonds passed the test as a resilient funding instrument. It was about the only non state-guaranteed asset class that was actually sold to the market. TO READ THE FULL STORY, SUBSCRIBE NOW.

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