One-third of investors polled at a recent NordLB event believe that structured covered bonds from Germany will establish themselves, but according to an analyst at the bank the majority expect them to be a surrogate for senior unsecured bonds. Investors’ views on the suitability of SME loans and other asset types as collateral, as well as ratings and volume and spread developments were also captured.

The Pfandbrief Day held at NordLB on 15 March brought together seven benchmark issuers from Germany and two Austrian issuers to present themselves to more than 80 participants, with NordLB covered bond analysts carrying out an investor survey within the context of the event. They posed 15 questions in relation to rating requirements, volume and spread development, and German structured covered bonds.

NordLB analyst Matthias Melms said that the survey results showed that investors hold controversial opinions on structured covered bonds, with some 33% believing that such debt issuance out of Germany will establish itself. The remainder expressed the opposite view.

Melms noted that structured covered bonds are mainly seen as a surrogate for senior unsecured bonds, with 58% choosing this as the asset class they think will be complemented or replaced by structured covered bonds from Germany in addition to 21% saying that covered bonds and senior unsecured bonds are likely to be affected in this way.

“However, a relatively large number of those surveyed think such constructs could be imposed to the detriment of Pfandbriefe (7% and 21% ‘both’),” said Melms.

Around 7% of those polled only chose covered bonds as the asset class that would be replaced or complemented by German structured covered bonds, while 14% said that neither covered bonds nor senior unsecured would be influenced by structured covered bonds in this way.

The analysts also asked what collateral investors would prefer were a structured covered bond to be offered. The most popular choice, at 46%, was mortgages with an LTV of above 60%, i.e. above the threshold for Pfandbriefe, followed by consumer loans (24%), SME loans (18%), then credit cards (12%). SME loans are the asset type that has most widely been touted as collateral for any structured covered bond issuance, while credit cards were used in the cover pool of South Korea’s Kookmin Bank.

Asked how much of a spread premium German structured covered bonds should offer over Pfandbriefe of the same maturity, Melms noted that 85% of investors surveyed said they would require a premium of more than 30bp and 34% said the concession should be more than 50bp.

Opinions on further spread development were unequivocal, according to Melms, with none of the surveyed investors expecting spreads to widen by the end of the year.

“Where only 59% see spread narrowing potential by the year-end for the German market, this value is significantly higher when it comes to the Austrian market at 81%,” he said. “Thirteen percent even assume a contraction of more than 10bp for this market.

“None of the investors see such potential for German Pfandbriefe.”

Answers to a question about investors’ minimum rating requirements for Pfandbriefe show that these covered bonds no longer necessarily have to have triple-A ratings, according to Melms.

“In this case, only 18% thought that a top rating is necessary, whereas 12% even said a rating in the BBB/Baa range was sufficient,” he said. “When asked which rating agency they preferred, 53% of survey participants said they favoured Moody’s, whereas 17% had no particular preference.”