The Association of German Pfandbrief Banks is proposing a new amendment to the Pfandbrief Act whereby payment may be delayed after an issuer insolvency if it is not possible to generate sufficient liquidity to repay principal.

The proposals were outlined in an article in the vdp’s latest newsletter by Otmar Stöcker, managing director at the association.

An official English translation of the article is not yet available, but Bernd Volk, head of covered bond and agency research at Deutsche Bank, said that the purpose of the move is to prevent a second insolvency procedure occurring, i.e. an insolvency of the cover pool after an issuer insolvency in the event that it is not possible for the cover pool administrator to generate liquidity.

“The proposed ‘legal framework-based delay of payment’ mechanism is supposed to clarify that it is not intended to provide OC or liquidity relief for the cover pool regarding rating agency requirements but only a last resort option for the cover pool administrator,” he said.

According to Volk, conditions relating to a delay in payment are that:

• it be applicable to all Pfandbriefe, i.e. new and to outstanding Pfandbriefe.

• the delay can be a maximum of one year. An earlier payment should be possibility to prevent reinvestment risk at low/no/negative yields.

• only the principal but not the interest can be delayed (non-payment of interest would be seen as default by rating agencies).

• the potential delay of payment cannot be recognised in the cover pool calculation (as it is a last resort to prevent insolvency of the cover pool after issuer insolvency only).

• the 180 day liquidity requirement for principal and interest stays despite the introduction of an option to delay payment.

• the cover pool administrator is only allowed to delay payment if he is convinced that all liabilities can be fully and timely paid at the end of the new maturity.

• the details of the interest during delay should be regulated in the Pfandbrief Act. This should prevent differences between Pfandbriefe (as currently the case in covered bond countries applying soft-bullet structures based on documentation only).

• should be a last resort option for the cover pool administrator. The payment cannot be delayed automatically in case of a trigger event, i.e. it requires a decision by the cover pool administrator in addition to strict requirements.

Jens Tolckmitt, vdp chief executive, flagged the potential introduction of such an amendment last July, noting developments towards soft bullet maturity structures in other jurisdictions but stressing the need for a legislative solution in Germany.

Volk said that the move is sensible in the context of wider developments. However, he noted that the vdp initiative is not driven by the goal of providing relief from rating agency requirements but of providing a last resort option for the cover pool administrator in times of stress.

“It remains to be seen how the law will be worded and how rating agencies react regarding their OC and liquidity requirements,” he added.

Jens Tolckmitt, vdp chief executive will be discussing the proposals and maturity-related matters on a panel at our conference on 9 June – click here for more details.