Pfandbrief issuers on a panel at an LBBW conference on Friday mostly tentatively agreed that structured covered bonds have a future in jurisdictions such as Germany, although the preservation of the Pfandbrief weighed heavily on their minds.

Moderator Michael Zlotnik, an independent rating advisor and former head of EMEA bank ratings at Standard & Poor’s, prompted the discussion on structured covered bonds when he noted that senior unsecured, and to some extent, secured funding opportunities had diminished.

“On the one side, the banks’ ability to raise unsecured funds has been dramatically impaired until at least very recently,” he said. “We will have to see whether this situation persists. On the other side, there are limits to how much secured financing a bank can raise in light of availability of eligible collateral, repo haircuts, and rising overcollateralisation requirements imposed by the rating agencies.

“Can you elaborate a little bit more on what solutions you see to address this dilemma?” he asked panellists.

Andreas Schenk, global head of treasury at Deutsche Pfandbriefbank, was emphatic that structured covered bonds might be a solution for secured funding, but added that issuers would have to be careful not to hurt the German Pfandbrief.

“I think we in Germany have to be very careful that we do not hurt our main funding instrument,” he said.

Deutsche Pfandbriefbank’s interest in possibly utilising structured covered bonds emerged in September, but Schenk told The Covered Bond Report the bank has no plans to issue yet.

“We always said this is an alternative, which we might look at, not plans,” he said.

He said at the panel that he did not expect a large structured covered bond market to evolve.

“I doubt that we will have a big structured covered bonds market,” he said. “I see these as more private transactions, for investors who are willing to invest in the bank, but want to have some security.

“That’s not a public deal – that’s more or less a bilateral agreement.”

Hans-Joachim Strüder, a member of LBBW’s board of managing directors, who also sits on the board of managing directors of the Association of German Pfandbrief Banks (vdp), said the issue of structured covered bonds had been discussed at the vdp.

“We at the vdp have discussed the issues of structured covered bonds and should we somehow dilute the present regulation to such an extent that we extend the Pfandbrief law.”

Strüder said the vdp had decided that was not the right strategy.

“We want to have the same high quality of product as in the past,” he said. “If then other segments develop over time, like structured covered bonds, then that is a matter of the markets, not of the vdp.

“I think there will be avenues to take advantage of, like small and medium sized corporate loans that you could put into a structured covered bond,” he added. “A number of houses, including ourselves, are working on this issue.”

He said it was a project that would appear on the market sooner or later.

Bernhard Heinlein, member of the board of management at Münchener Hypothekenbank, said a structured covered bond would not be considered as being in line with the issuer’s quality standards.

“MunichHypo has no intention of issuing structured covered bonds,” he said. “We will stick to the high quality of Pfandbriefe.”

Philipp Waldstein, head of group strategic funding and portfolio at UniCredit Group, said he would highly welcome creative ideas, like structured covered bonds, but would not name them as such.

“We wouldn’t call them Pfandbriefe,” he said. “Maybe we would call them collateralised securities.”