HSH Nordbank is entering into a transaction with Kreditanstalt für Wiederaufbau for the credit protection of SME loans under the latter’s Promise synthetic securitisation platform that will allow the Pfandbrief issuer to add the guaranteed loans to its public sector cover pool.

KfW, Frankfurt

According to Moody’s, KfW has issued senior swap and Class A+ notes under a Promise Neo 2012-1 transaction, in which HSH buys credit protection on a portfolio of secured and unsecured loans granted by the bank to small and medium-sized enterprises (SMEs) domiciled mainly in Germany.

The rating agency said that HSH’s aim for the synthetic transaction has been to obtain credit protection on its SME loan book, which allows the bank to add the reference claims plus the attached guarantee claims against KfW to the cover pool of its public sector covered bond. “This, in combination with the legal framework for covered bonds in Germany, explains why (different to other synthetic transactions in the German market) this Promise Neo 2012-1 transaction does not terminate in full upon a potential insolvency of HSH Nordbank,” said Moody’s.

The transaction consists of a Eu721.77m senior swap and a Eu0.1m Class A+ certificate, to which Moody’s on Thursday assigned a provisional Aaa (sf) rating on Thursday.

The Covered Bond Report was not able to reach an appropriate HSH Nordbank spokesperson for comment by the time of publication.

The move is not the first time that a German issuer has used KfW-guaranteed assets as Pfandbrief collateral, with Deutsche Postbank, for example, having obtained a guarantee from the government development institution on residential mortgages as what it sees as the most cost efficient way to achieve cover pool eligibility for a portfolio of small residential mortgages. As at 31 March, 15.4% of Postbank’s public sector Pfandbrief cover pool comprised KfW-guaranteed residential mortgage loans.

SME loan-backed covered bonds are not permitted under Germany’s Pfandbrief legislation nor in most established European covered bond legislative frameworks, although there are precedents for such issuance – in Turkey, for example. The possibility of using covered bonds to finance SME loans has come in for interest, however, in the absence of asset-backed securitisations as an alternative funding source and as banks are under pressure to lend to the real economy. Plans for legislative covered bonds backed by SME loans are underway in Austria, for example, while German issuers have explored structured issuance outside Pfandbrief legislation.

But the European covered bond industry is also intent on preserving and furthering favourable regulatory treatment of the asset class by ensuring that the funding instrument’s identity and attributions are not diluted by a broadening of assets used as collateral. The European Covered Bond Council’s label is intended to directly address this issue, for example.

Photo: KfW-Bildarchiv/Thomas Klewar