Pfandbrief Act transparency changes welcomed, but gaps still seen
Amendments to Germany’s Pfandbrief Act adopted by the German cabinet this week – which include enhanced transparency requirements and technical changes relating to the covered bond administrator among others – have been welcomed by covered bond analysts, although some suggested that more could have been done.
The proposed amendments are included in a draft bill introduced by the German government on Wednesday that implements Basel III/CRD IV into German law.
“The 2012 amendment of the Pfandbrief Act addresses technical issues regarding the appointment of the cover pool administrator (Sachwalter) and facilitates access to information by a future cover pool administrator at an early pre-insolvency stage,” said analysts at UniCredit. “Furthermore, the role of cover pool administrator and insolvency administrator is clarified in more detail. The new version of the Act technically places the two legal bodies in the same hierarchy.
“Last but not least, German lawmakers have addressed the degree of detail regarding disclosure requirements – again driven by the awareness that in times of crisis, investors’ need for information is higher.”
Fitch said today (Friday) that the amendments to §28 of the Pfandbrief Act, which sets out Pfandbrief issuers’ quarterly disclosure obligations, will be positive for investors by giving them a fuller picture of market risk contained in covered bond programmes.
Changes cited by the rating agency include enhancements relating to: disclosure of the proportion of fixed rate cover pool asset and covered bonds; possible currency mismatches; the weighted average seasoning of real estate loans in the cover pool; the share of ECB eligible cover assets; detail on substitute assets; and a finer breakdown of the maturities of assets into six month bands for the upcoming two years.
UniCredit analysts noted an increase in the number of bands for disclosure of the size of loans in the cover pool, but said that the increase from three bands to four was surprisingly low.
“We no longer live in times when bookkeepers have to rub their elbows on piles of paper and rearrange loans by size using a pencil and a ruler,” they said. “In times of highly developed IT, defining a new step with each multiple of Eu100,000 should not pose a major problem.
“Would this constitute a significant improvement with respect to information? Probably not. Are non-German issuers able and willing to provide the data? Yes. Has the Pfandbrief community ever settled for second best? No.”
Fitch meanwhile noted that there is still no provision for loan-to-value (LTV) disclosure on mortgage assets.
“We acknowledge the practical challenges of LTV disclosure, for example in disentangling complex arrangements where more than one loan to more than one borrower is secured on the same property,” said the rating agency. “In Sweden, covered bond issuers have agreed to calculate and present some key cover pool statistics, including the weighted average LTV, uniformly (through the ‘Max LTV per property’ method). This shows that progress towards consistent LTV calculation and disclosure across programmes is possible.
“The Pfandbrief Act already prohibits the inclusion in the cover pool of loans or loan parts with more than 60% LTV based on mortgage lending values. Nevertheless, we think more details on LTVs would give investors a useful tool to compare mortgage Pfandbrief programmes.”
UniCredit analysts said that the amendments also clarify the role and powers of the cover pool administrator in ways which are positive for investors.