Berlin Hyp is offering to buy back up to Eu3bn of public sector Pfandbriefe while reducing their overcollateralisation (OC) towards the legal minimum – likely causing a downgrade – to mitigate the costs involved in meeting Fitch OC levels for its mortgage Pfandbriefe.

The tender offer was launched today (Thursday), and targets Eu4.5bn of four outstanding jumbo public sector Pfandbriefe maturing between August 2012 and May 2019. The issuer has capped the amount it will buy back of those Pfandbriefe that have a term-to-maturity of more than one year (at Eu750m for January 2014 and March 2017 issues, and Eu500m for a May 2019 jumbo) but has not set a repurchase limit on a Eu1bn 3.75% due in August.

JP Morgan and Landesbank Berlin are joint dealer managers.

Bodo Winkler, head of investor relations at Berlin-Hannoversche Hypothekenbank, told The Covered Bond Report that an increase in Fitch’s overcollateralisation requirements for the issuer’s mortgage Pfandbriefe was the trigger for the decision to launch a buyback of public sector Pfandbriefe, given the bank’s aim to continue running a sustainable and profitable real estate business and the phasing out of its public sector financing activities.

“Mortgage Pfandbriefe are our most important refinancing instrument,” he said, “and we are committed to supporting their rating, but overcollateralisation costs money.

“Reducing the overcollateralisation of the public sector Pfandbriefe compensates for the negative impact on our P+L that comes from the OC requirements for the mortgage Pfandbriefe.”

Investors holding the bank’s public sector Jumbo Pfandbriefe have an opportunity to exit their positions at attractive levels, added Winkler.

Fitch rates Berlin Hyp’s mortgage Pfandbriefe AA+ and “requires” (the term used by the issuer but one that rating agencies typically resist) overcollateralisation of 24.5% to maintain this rating.

“This number has almost doubled following Berlin Hyp’s issuer rating downgrade from AA- to A+ in October 2011,” said the issuer, adding that it will comply with Fitch’s overcollateralisation requirements.

“The decrease in overcollateralisation in the public sector Pfandbrief cover pool will support the required increase in the overcollateralisation in the mortgage Pfandbrief pool,” it said.

The Covered Bond Report understands that, all else being equal, OC of 24.5% would allow Berlin Hyp’s mortgage Pfandbriefe to maintain their AA+ from Fitch rating as long as the issuer is rated BBB+. Berlin Hyp is rated A+ by Moody’s. Moody’s rates Berlin Hyp’s mortgage Pfandbriefe Aa1.

Fitch and Moody’s rate Berlin Hyp’s public sector Pfandbriefe triple-A, with the OC levels in line with these ratings standing at 11% and 7% at the respective rating agency.

Berlin Hyp said that it will no longer maintain these ratios and has decided to follow the German Pfandbrief Act, which requires a minimum 2% overcollateralisation, and an additional buffer.

“Berlin Hyp expects that this will result in a downgrade of the ratings of its public sector Pfandbriefe,” it said. “The tender process gives investors in the abovementioned public sector Pfandbriefe the possibility of returning them to Berlin Hyp prior to maturity.”

The buyback comes after BerlinHyp some time ago ceased to actively pursue its public sector financing activities, as a result of which the volume of its outstanding public sector Pfandbriefe has been steadily declining.

“The announced cash tender will accelerate this process,” it said.

Berlin Hyp has set a purchase price of 101.05% for the Eu1bn August 2012 jumbo, and spreads of 60bp and 16bp through mid-swaps for Eu1.25bn issues maturing in January 2014 and March 2017, of which it will buyback a maximum of Eu750m each. It is offering to repurchase Eu500m of a Eu1bn May 2019 jumbo at 5bp over mid-swaps.

The purchase prices that have not yet been determined will be fixed on 4 May, a day after the tender offer expires.

According to Thomas Meister, deputy head of treasury at BerlinHyp, the premium on offer for the longer dated issues is around 100 ticks over the offer price before the announcement, and around 50 ticks over for the shorter dated Pfandbrief.

“If investors want to exit their positions they can get a very attractive price,” said Meister.

The three longest dated Pfandbriefe, with a remaining maturity of more than one year, that are subject to the tender offer will remain in the iBoxx Covered Bond Index, according to BerlinHyp, because the caps on the notional provide that they will retain a minimum outstanding notional of Eu500m.

BerlinHyp had Eu7bn of public sector Pfandbriefe outstanding as of 31 December, compared with Eu12.1bn of mortgage Pfandbriefe.

Although covered bond buybacks have become common this year, they have been predominantly for issuers from peripheral jurisdictions, with Portugal the busiest, although Austria’s Bawag-PSK joined in the trend. Germany’s Allgemeine HypothekenBank Rheinboden, now Corealcredit in 2007 bought back public sector Pfandbriefe when exiting that part of its business.