Pfandbriefe have a higher proportion of their cover pools protected against fire-sale risk than other European covered bonds, according to Moody’s, which cited the types of collateral, age and financing options of German programmes as reasons for this.

The rating agency said that German Pfandbrief programmes benefit from a lower level of “maximum mismatch” compared with covered bonds issued by other European jurisdictions. Moody’s uses “maximum mismatch” as a measure of the portion of the cover pool that may be exposed to fire-sale risk given asset and liability principal payment profiles, expressed as a percentage of total covered bonds outstanding (see below for more details).

On average, Moody’s said, the level of mismatch for German covered bond programmes is three times lower than those from other areas of Europe. In particular, it highlights peripheral jurisdictions – namely Greece, Ireland, Italy and Portugal – are typically those areas with higher levels of maturity mismatch.

The rating agency gives three reasons for the low levels of mismatch in Germany: the role played by public sector-backed programmes; that German programmes are on average more mature; and the wide range of financing options open to German programmes.

According to Moody’s, public sector-backed Pfandbrief feature government loans – both central and local – that, on average, carry a lower weighted average life than other cover pool assets.

“The shorter the life of a cover pool asset, the greater the chance it will be repaid prior to the maturity of the relevant covered bond,” said Martin Rast, vice president, senior credit officer at Moody’s. “We expect a material portion of these loans will mature before they are exposed to fire-sale risk.”

The rating agency notes that the age of German covered bond programmes also plays a significant role in reducing the risk of refinancing. According to Moody’s, German covered bond programmes average around the 10 year age mark, and the older the programme the lower the portion of assets subject to fire-sale risk, as the supporting issuer has a longer period of time to issue Pfandbriefe that extend over a range of maturity dates. Moody’s found the maximum level of mismatch for a programme of 10 years or older to be on average 11.7%, with five year-10 year programmes at 44.5%, and five year or less at 53.5%.

“Covered bonds that mature gradually are better able to match the maturity profile of the cover pool assets,” said Rast.

In addition, Moody’s notes that Germany benefits from “established investor demand for long dated maturities” and cost-effective issuance of shorter dated covered bonds, which the rating agency says provides Germany with a wider range of funding options, providing them with a better opportunity to manage maximum mismatches.

Average maximum mismatch significantly lower in Germany than other European countries

Note: The calculation of the maximum mismatch is a measure of the portion of the cover pool that may be exposed to fire-sale risk given the asset and liability principal payment profiles and this mismatch is expressed as a percentage of the total outstanding covered bonds (the total liabilities). A number of assumptions are made when calculating the maximum mismatch, and these include: (1) there are no future prepayments on the assets; (2) the principal collections are limited to the portion of assets that make up the amount of the liabilities plus committed over collateralisation (OC) i.e., the benefit from voluntary OC is not considered; (3) the calculation is based on principal flows only, i.e., we do not consider the interest net income which is usually credit positive as the cover pool assets typically yield a higher margin than the covered bond liabilities; and (4) the covered bonds are repaid at the earliest agreed maturity date, ignoring structural features, such as extension periods, that may reduce the portion of assets subject to fire-sale risk.

Source: Moody’s