The German authorities and the Association of German Pfandbrief Banks (vdp) are considering introducing soft bullet structures for Pfandbriefe and, according to the vdp’s chief executive, are exploring the best and safest way for the maturity structure to be implemented.

Most covered bond issuers today use soft bullets or other structures with some form of maturity extension, such as conditional pass-throughs (CPTs), with several having switched from hard bullets in the past couple of years. Others have converted outstanding hard bullets into soft bullets, while Denmark last year changed its legislation to introduce conditional maturity extension in certain cases and updated Polish legislation coming into effect on 1 January includes CPT-style structures. In Germany a Commerzbank SME-loan backed structured covered bond issued outside the Pfandbrief Act in February 2013 had a CPT-style maturity structure.

German publication Immobilien & Finanzierung reported on the discussions around soft bullet Pfandbriefe last week and Jens Tolckmitt, chief executive of the vdp, confirmed the development to The CBR today (Friday).

“We have been working on it internally for quite some time,” he said, “and, having analysed the situation and what we have seen in other European countries, we do think that there are good arguments in favour of introducing it.”

German Pfandbrief legislation has regularly been amended to strengthen the product and although any soft bullet introduction will not be included in the latest amendment, which is currently going through parliament, it could be included in a future update once all relevant issues have been properly considered.

“What we in Germany have been doing whenever we have amended the Pfandbrief Act over the last years is to address issues that we think make it easier for the cover pool administrator (Sachwalter) to fulfil his role if there is an insolvency of the bank,” said Tolckmitt, “and I would say this is a consideration that is exactly again in this direction.”

Different ways of implementing a soft bullet structure have been considered, including for the cover pool administrator to be able to delay repayment by up to six months twice, i.e. up to a total of 12 months. Other aspects under discussion include, for example, whether all German Pfandbriefe or only newly-issued ones would be subject to the amendment.

“We have seen that the existing structures in the market so far have been rather well received,” said Tolckmitt, “and we want to make sure that anything we provide makes investors feel safe. Our main goal, as always, is to make investors not shy away from the product.

“And, as always, we would obviously be in favour of doing it in the law and not on a contractual basis,” he added, “as we don’t like contractual arrangements as they are not as transparent as legal arrangements.”