The credit quality of NordLB aircraft Pfandbriefe is better than a “defensive” rating assigned to the covered bonds by Moody’s suggests, according to a banker close to the new issue project, with the issuer noting that a deal would give investors the opportunity to acquire at a “compensating” spread a product that is undervalued in terms of rating.

More than four years after Germany’s Pfandbrief legislation was amended to allow for aircraft Pfandbriefe, NordLB has mandated banks and is on a roadshow to introduce its programme to investors in Austria, Germany, Luxembourg and the UK. The roadshow is split into two parts, with a German leg having finished on Friday and the international leg concluding next Monday (9 July).

A banker close to the new issue project said that the roadshow has met with a lot of interest because investors are curious about the new asset class, and that feedback has been positive.

“A lot of medium sized accounts that are familiar with Pfandbriefe have indicated strong interest and even the larger accounts are looking into the product” he said.

He also said that NordLB’s aircraft Pfandbrief move is clearly targeted at the traditional Pfandbrief investor base and those accounts that would otherwise not buy Pfandbriefe but perceive an opportunity to invest in a NordLB Pfandbrief at levels closer to those for NordLB senior unsecured private placements.

For NordLB, the product represents an opportunity to diversify funding sources, which should lower aggregate funding costs, said the banker.

“Ideally NordLB would like to issue benchmark aircraft Pfandbriefe in the same volume and frequency as they issued public sector Pfandbriefe in the past,” he said. “The reception to the first deal will give clues as to whether this will be possible.”

Moody’s has assigned a preliminary A2 rating to the aircraft Pfandbrief, one notch above the issuer, citing a lack of relevant historical data available to study full cover pool defaults in the context of aircraft financings as a key reason for the rating.

The banker said that this amounts to a “defensive one-notch-upgrade-only” approach, based on the issuer’s senior rating.

According to NordLB, the default rates for the bank’s aircraft portfolio are significantly better than those for mortgage portfolios in general over the past three decades, implying that the NordLB aircraft cover pool is more akin to a triple-A rated portfolio.

The banker also noted that should NordLB go ahead and issue a Flugzeugpfandbrief benchmark, the transaction will probably be eligible for inclusion in the relevant iBoxx covered bond index.

In a roadshow presentation the issuer said that the aircraft Pfandbrief product is undervalued in terms of its rating, and that investors could acquire it at a compensating, attractive spread, expected to be between that for the bank’s mortgage Pfandbriefe and senior unsecured debt.

DZ Bank analyst Michael Spies said that in contrast to new issues in recent months, a NordLB aircraft Pfandbrief should be priced to include a new issue premium because it will be launching a new segment and there is no prospect of liquidity.

“We do not expect the aircraft Pfandbrief segment to ever grow beyond a niche product role,” he said, adding that while several traditional Pfandbrief issuers are also active aircraft finance providers the German central bank has said that it has only granted one aircraft Pfandbrief license so far.

“Just like ship financing, the aircraft finance market is also dominated by smaller specialist banks,” he said, “another reason why the aircraft Pfandbrief market will never play a starring role in the covered bond market.”

Bernd Volk, head of covered bond research at Deutsche Bank, said that with only notch uplift from the issuer rating, NordLB’s aircraft Pfandbriefe seem under-rated relative to the issuer’s senior unsecured bonds, with a collateral score of 100% suggesting that not even an extremely high share of subordination would be able to convert part of the cover pool into a triple-A securitisation tranche. The penalties for what Moody’s perceived to be a lack of relevant historical data seems too severe, he said, noting that the rating agency has a stable outlook for the aviation industry in general.