Commerzbank is aiming to be in a position to issue Pfandbriefe as of the end of 2013 to fund a repositioned real estate business as the bank winds down its commercial real estate and public finance subsidiary, Eurohypo, to comply with a EU restructuring plan.

The plan was revealed in connection with the release of details on 30 March about the European Commission’s conditions for the restructuring of Eurohypo, in accordance with which Commerzbank will not be required to dispose of its subsidiary, but to wind it down instead, with the subsidiary being split into non-core activities and core activities.

Public finance activities and the bulk of the commercial real estate business, to be organised in a new Non-Core Assets segment, will have to be reduced in full, while a “clearly scaled down” part of the commercial real estate financing business in France, Germany, Poland and the UK may be continued as part of a new Commerzbank business segment called Real Estate & Ship Finance (RES). Some Eu10bn of Eurohypo retail business assets are also due to be integrated into Commerzbank.

According to Commerzbank, the lender’s commercial real estate (CRE) banking business will focus on countries that meet certain criteria, such as that the business in these markets be eligible for funding via Pfandbriefe, with LBBW senior credit analyst Alexandra Hauser noting that the bank is withdrawing its CRE business from 29 out of 33 target markets as a result of this condition and other country selection criteria.

New business in the CRE segment, including prolongations, is due to be booked in Commerzbank, with the bank in this context in a presentation referring to the issuance of covered bonds “as of end 2013, once the new Commerzbank cover pool platform is implemented”.

The Covered Bond Report understands that Commerzbank is also separately seeking to obtain a Pfandbrief licence in connection with the full takeover of Deutsche Schiffsbank, as announced in March 2011, and that this could be achieved this year.

The European Commission’s restructuring plan for Eurohypo also caps the volume of core activities in the new Commerzbank CRE business segment to Eu25bn until the end of 2015, with new business volume restricted to Eu5bn per year until then. In addition, the restructuring conditions require Commerzbank to reduce its balance sheet to Eu600bn as of the end of 2012, excluding the run-off portfolios, and extend an acquisition ban to the end of March 2014.

The plan also foresees the Eurohypo brand being discontinued, with a new company name to be announced “at a later point in time”, according to Commerzbank. Eurohypo will be continued “for the time being” while adapting to the changing business framework conditions, said its parent.

LBBW’s Hauser noted that some key points of how the restructuring will be implemented have been revealed, such as that the Eurohypo portfolios have already been selected and divided into core and non-core areas. For the time being the portfolios will remain with Eurohypo, but will be assigned to the various Commerzbank segments.

She said that Eurohypo and Commerzbank will not merge, and that, as a legal unit, Eurohypo will therefore retain all retain all assets and liabilities and will remain a Pfandbriefbank.

“Accordingly, Eurohypo’s Pfandbriefe will remain in this legal unit and will continue up to maturity,” she said. “The entire cover pool of the Hypothekenpfandbriefe (Hypfe) and the related Hypfe-based funding cover both the core and non-core activities of commercial and residential real estate finance.”

In the case of public sector backed Pfandbriefe issued by Eurohypo, the cover pools and corresponding Pfandbriefe are all in the non-core business, she added.

NordLB head of fixed income research Michael Schulz estimated that some Eu50bn of the assets in the cover pools backing Eurohypo’s Pfandbriefe – mortgage and public sector – will have to be wound down, and that this covers a Pfandbrief volume of around Eu45bn-Eu48bn.

He noted that the possibility that the European Commission might come to an agreement with Commerzbank about a wind-down concept had been mooted for some time, and that NordLB analysts had seen potential for a narrowing of spreads in connection with such a scenario happening.

“We are sticking to this hypothesis,” he said, “mainly in view of the fact that the threat of a deterioration in rating structure because of a buyer with a lower rating is no longer an issue,” he said. “In the last few months, the spreads of Eurohypo’s Pfandbriefe outstanding have already edged in considerably, leading to a narrowing in a aggregated issuer spread (non-volume weighted) by around 50% or 30bp since the beginning of the year.”

Photo: Julia Schwager, Commerzbank AG