Pfandbrief banks refinancing export finance loans will now be able to do so with the benefit of a clear guarantee from the sovereign and hence include them in public sector cover pools, following a German government move that could spur greater issuance of public sector Pfandbriefe.

Loans backed by sovereign-guaranteed export credit agencies (ECAs), such as Germany’s Euler Hermes, have been used as collateral for public sector covered bonds from a variety of issuers in jurisdictions including France, Germany and Spain. According to LBBW analysts, ECA-backed export finance comprises 7% of the public sector cover pools of members of the Association of German Pfandbrief Banks (vdp), totalling €11.6bn.

But although Pfandbrief issuers have been able to include some export finance loans, they have been almost unable to include loans where they are refinancing export finance granted by other banks. This was due to a banking practice whereby, in most cases, the export financing bank would remain holder of the export credit claim and assigned it to the Pfandbrief bank only for security purposes.

The German government previously introduced a so-called “securitisation guarantee” (Verbriefungsgarantie) that, alongside the credit insurance, export financing banks could apply for in order to cover the refinancing loans via Pfandbrief banks. However, it was not clear whether the Verbriefungsgarantie only covers the default risk of the borrower of the export credit, or if it, furthermore, could be interpreted as covering the default risk of the financing bank on behalf of the funding loan-claim in favour of the Pfandbrief bank, as required by the public sector eligibility criteria of Article 20 of the Pfandbrief Act.

The previous guarantee uncertainty:
Scenario: Pfandbriefbank as “beneficiary” owner of the export credit claim

“We had legal concerns whether the existing version of the securitisation guarantee would cover this and we wanted to obtain legal certainty for the future business of our member banks,” said Winnie Hartisch, manager, public finance, at the vdp.

For several years the association sought to clarify the situation with Euler Hermes and in March this year received confirmation from the German regulator that – in light of the above issue – the guarantee was not sufficient for public sector cover pool eligibility. On the back of this opinion, the vdp again approached Euler Hermes on the matter.

The initiative coincided with the onset of the Covid-19 crisis, with the German government looking for ways to support its exporters, and the federal government on 7 July adopted a commitment to revise the securitisation guarantee such that the relevant bank default risk is explicitly covered.

The German government’s announcement will ensure eligibility of such loans for public sector Pfandbrief cover pools, according to Hartisch, meaning that Pfandbrief banks can support exporting financing banks in their lending (even if the exact wording of the new version of the guarantee is yet to be finalised by Euler Hermes and the government in its role as the state guarantor).

“This will enable export financing banks who are not Pfandbrief banks to offer German exporters more attractive credit conditions,” she told The Covered Bond Report. “We believe this will be an important contribution to overcoming the economic crisis.”

Noting that public sector Pfandbrief outstandings have fallen around 85% since 2002 to €124.4bn, LBBW senior investment analyst Karsten Rühlmann said the move could increase the importance of public sector Pfandbriefe, of which €11.2bn were issued in 2019.

“The new version of the Hermes securitisation guarantee – which is part of a five-point package of measures to support German exporters – makes it more likely that Pfandbrief banks will cooperate more extensively with other commercial banks on export financing,” he said.

Hartisch said export financing banks have reacted positively to the news and consider additional export financing volumes “in the billions” to be possible, but noted that the ultimate outcome will depend on a variety of factors. She also pointed out that the additional lending volumes might not be reflected to a similar extent in cover pools. Non-Pfandbrief banks also still have the option of themselves seeking a Pfandbrief licence, thereby obviating the need to cooperate with Pfandbrief banks in refinancings, and she said banks will have to weigh up the relative costs of going down either route.