BaFin eases Bausparkasse soft bullet ban, but restrictions remain
BaFin has eased a ban on German building societies buying soft bullet covered bonds, in a move that acknowledges the prevalence of the structure in today’s market, but has limited investments to criteria that NordLB analysts said could be hard to confirm until the EU Directive is completed.
Details of BaFin’s previous prohibition on Bausparkassen buying soft bullet covered bonds emerged in late 2017. The Federal Financing Supervisory Agency said the optionality in soft bullet structures poses a “significant liquidity risk”.
BaFin was also understood to have considered that such a ban would not significantly diminish the investment opportunities of Bausparkassen, but – as well as defending the soft bullet structure – many market participants suggested the regulator had underestimated the prevalence of soft bullets in the market – even if Germany’s Pfandbrief market remained hard bullet-only. According to NordLB analysts, soft bullet structures constitute 49.6% of the iBoxx EUR Covered index by volume, more than the 48.2% share of non-extendible issuance – conditional pass-throughs (CPTs) make up the remaining 2.2%.
The NordLB analysts highlighted last week that BaFin has now written to the Association of Public German Bausparkassen (LBS Bundesgeschäftsstelle), saying that they may invest in soft bullet covered bonds, subject to certain conditions. In its letter to the LBS Bundesgeschäftsstelle earlier this month, the regulator details the two conditions (as summarised by NordLB):
- BaFin first stipulates that only grounds for initiating insolvency proceedings as defined by the German Insolvency Code (InsO) can be used as triggers for maturity extension. The credit event is therefore limited to the presence of insolvency (we understand this to be within the meaning of Article 17 InsO), impending insolvency (within the meaning of Article 18 InsO) as well as overindebtedness (within the meaning of Article 19 InsO).
- Secondly, only soft bullet covered bonds where the maturity extension can only happen once and for a maximum of 12 months are eligible.
“The opportunity to invest in soft bullet covered bonds now open in principle to Bausparkassen is to be welcomed,” said Matthias Melms, head of covered bonds and SSA research at NordLB. “However, we would point out at this juncture that the restrictions applying to fundamental eligibility continue to constitute a reduction in the investment universe for Bausparkassen seeking to invest.”
The analysts said that while the second condition is not overly strict, the first could prove challenging.
“Ultimately, the investor would have to check in each individual case that the corresponding bond was compliant with the grounds for initiating insolvency proceedings in line with the Insolvency Code,” said Melms. “We believe this case-by-case assessment would involve considerable effort.”
However, he suggests the EU Covered Bond Directive could help in this regard.
“The ECON committee’s current proposal for Article 17 and extendable maturity structures states that an extension should only be permitted if the issuer is insolvent or is being wound up (exact wording: ‘the maturity can be extended only in the event of insolvency or resolution of the issuer and with approval by the competent supervisory authority or under objective financial triggers established by national law’; see current proposal from the European Parliament),” said Melms. “Essentially, we would see this wording as compliant with BaFin’s view.”
Investment in conditional pass-through (CPT) covered bonds was also prohibited by BaFin for Bausparkassen, and this position has not changed.
A BaFin spokesperson said he was unable to comment on the issue and noted that the regulator had not yet published an official announcement.
Photo: BaFin, Bonn