Pfandbrief amendments target directive, maturities, Art 129
Draft amendments to Germany’s Pfandbrief Act put out by the Ministry of Finance on Friday include proposals to allow for maturity extension of Pfandbriefe, as well as aligning legislation with the EU directive and CRR Article 129, and have been given a positive early reception.
The draft bill – 60 pages including associated texts – is subject to a consultation period running to 29 October and should come into force ahead of the transposition deadline for the directive of 8 July 2021, while parallel changes to the CRR as part of the EU covered bond legislative packaged are applicable from July 2022.
“Most market participants should welcome the proposal, on the whole, as it is a fairly straightforward implementation of the directive with no additional, onerous requirements,” said Michael Weigerding, covered bond analyst at Commerzbank.
Sascha Kullig, member of the management board, head of capital markets and investor relations, at the Association of German Pfandbrief Banks (vdp), said the industry body welcomes the draft bill.
“We are currently still digesting it, and there are probably a few things that we will suggest to change,” he told The CBR, “but overall, our impression is that it is a very good proposal from the Ministry of Finance – it covers all that it had to in respect of the directive.
“What is even more important is that it aligns the Pfandbrief Act with Article 129 of the CRR, because it is always our aim to have the legislation such that Pfandbriefe by law fulfil Article 129 so that investors don’t have to check whether or not those requirements are met – they can be sure that if they buy a Pfandbrief, it fulfils Article 129.
“Moreover, it also includes maturity extension – finally we will get it, and we think this is quite a breakthrough.”
In conjunction with addressing the EU harmonisation project, the draft bill tackles the introduction of maturity extension for outstanding and new Pfandbriefe. The vdp has for several years been exploring how the product could be adapted to take in some of the benefits of structures that allow for maturity extension, notably soft bullets, while the topic was also prominent in discussions resulting in the final version of the covered bond directive, with a push to remove issuer discretion from the ability to extend maturity dates.
According to Weigerding at Commerzbank, under the ministry’s proposals, only the cover pool administrator (Sachwalter), who is appointed in parallel to an issuer insolvency, would be able to take such action.
“The Ministry of Finance’s soft bullet proposal has come closer to the goal of limiting the maturity extension to the last resort than have many variants used internationally,” he said.
A maturity extension of a maximum of 12 months can be instigated by the administrator “if it can be assumed that the Pfandbriefe can be repaid after 12 months at the latest as a result of the extension and if other terms are met”, according to Weigerding. The administrator can do this for an initial six months, and then a further six months, and can also unconditionally choose to postpone any interest and principal repayments upon their appointment for four weeks (which would ultimately be counted as part of the first six month period should that come into effect).
A 180 day liquidity buffer requirement of the directive, which was pioneered in Germany, should continue to refer to the expected, rather than extended, maturity date, according to Weigerding.
He said the interplay between any Pfandbriefe whose maturity are extended and other outstanding Pfandbriefe of the issuer can appear quite complex, while the wording of the provision could in parts be improved to be more easily understood.
Kullig at the vdp acknowledged this, but said that transposing the directive into law is not straightforward even if its aims appear simple.
“Maybe it could have been done in a slightly easier way,” he said, “but in reality, you have to regulate quite a few things to safeguard the sequencing.
“If the administrator decides to postpone maturing Pfandbriefe,” he added, “he has to fulfil certain requirements – he has to check if the cover pool is overindebted, if he can be quite confident that after postponing he will be able to repay the Pfandbrief, and that kind of thing.”
Notable among other changes to align the Pfandbrief Act with EU legislation is the introduction of a minimum nominal overcollateralisation (OC) requirement, to be set at 2% for mortgage and public sector Pfandbriefe and 5% for other Pfandbriefe. This will align Pfandbriefe with CRR Article 129 – German legislation currently only has a 2% minimum present value OC requirement.
According to Weigerding, some issuers could find that their cover pools do not meet the new requirement or that they have reduced issuance leeway, prompting adjustments to pools or issuance volumes.
Following the consultation on the proposals, a revised bill is expected to be put to parliament by the German government in the first quarter of 2021.
While parts of the bill will enter into force after it is passed, others will only come into force alongside CRR Article 129 amendments on 8 July 2022, meaning that some parts of the Pfandbrief Act will face two rounds of changes under the proposals.
Photo: German Ministry of Finance; Credit BMF/Hendel