NordLB Luxembourg Covered Bond Bank (CBB) will discontinue its covered bond business from 2022 under the latest steps in a transformation plan of the group, but the entity will not be shut down and Moody’s lettres de gage ratings will be maintained, a NordLB spokesperson told The CBR.

This updated article clarifies, corrects, and expands on elements of the version we published last Thursday, following input from NordLB on Friday.

The planned end to NordLB CBB’s covered bond activity was announced as part of a NordLB update to its transformation strategy, with the Luxembourg issuer on 26 November releasing an investor communication confirming that the group will “discontinue the covered bond business actively operated by NordLB CBB from 2022 onwards”. It said this relates to both new issuance activities via lettres de gage publiques and renouvables (renewable energy), as well as to the further accounting of new loan transactions as part of the development of the respective cover pools.

“NordLB Covered Bond Bank remains an integral part of NordLB Group, including the letter of comfort,” it said. “In 2021, NordLB Covered Bond Bank will still be able to issue and plans issues in private placement format. The bank will continue to strive for stable ratings. The two existing cover pools will be actively managed and the assets required to manage the cover pool will come from the bank’s management portfolios.”

The statement was understood by some market participants [including The CBR] to mean that NordLB CBB would be closed.

However, a spokesperson for NordLB told The CBR that although covered bond activity will cease, the Luxembourg entity will not be shut down but “redimensioned”.

“We stick to our portfolio of outstanding bonds and will continue the associated servicing,” he said. “We also keep the ratings from Moody’s, too. In addition, the two existing cover pools will further be actively managed.”

Moody’s rates the lettres de gage publique and renouvables Aa2, and NordLB CBB A3, on stable outlook.

Fitch last Monday (30 November) withdrew its AAA rating of NordLB CBB’s lettres de gage publiques, citing commercial reasons, but said it does not consider the programme to be in wind-down – it rates the issuer A-, on negative outlook.

Citing the credit quality of the covered bonds, the ongoing Moody’s ratings, and letter of comfort from parent NordLB, Commerzbank analysts saw only limited downside risk for the covered bonds, which they noted already have limited liquidity.

NordLB CBB’s longest-dated benchmark matures in 2027, while its longest bearer lettres de gage mature in 2037 and it has registered lettres de gage due as far out as 2048, according to its end-September Covered Bond Label harmonised transparency template, which says it has €4.152bn of lettres de gage publiques outstanding. This year, as well as the aforementioned €500m 2027 benchmark, it sold the first lettres de gage renouvables, a €300m five year transaction that is its only green covered bond outstanding.

“These collateralised liabilities cannot be unilaterally reduced before maturity or transferred to other entities of the group,” said Commerzbank’s analysts. “And in our understanding, the LdG programme prospectus does not provide for investor voting, which could be used, for example, to squeeze out any remaining creditors or replace the debtor institution by means of a majority decision.

“This could raise hopes among investors of buybacks to shorten this process. Other ex-issuers, such as Depfa, have in fact actively accelerated their winddown that way.

After the fillip of this year’s brace of issuance, the planned closure of NordLB CBB now comes amid a downturn in the jurisdiction’s fortunes.

The only other entity with outstanding lettres de gage is Commerzbank Finance & Covered Bond SA (formerly Erste Europäische Pfandbrief- und Kommunalkreditbank). As of the end of 2019, it had €1bn of unrated lettres de gage publiques outstanding, but, according to an October 2020 Moody’s analysis of the institution, it stopped covered bond issuance in light of the Luxembourg product becoming ineligible for ECB repo in October 2015.

And the attractions of the jurisdiction are expected to be further hit if a EU delegated act updating LCR eligibility goes through as drafted. Under Commission proposals, a previous reference to UCITS alongside CRR Article 129 is being dropped, meaning that lettres de gage would no longer be LCR-eligible (although outstanding issuance would be grandfathered).

The Luxembourg Bankers’ Association (ABBL) highlighted this issue on Tuesday of last week (24 September) in a submission to the consultation on the delegated act, proposing – alongside other parties – that a reference to the Covered Bond Directive be used.

“Such an approach would create an unlevelled playing field to the expense of covered bonds,” it said. “Also, it would undermine the intention and the initial motivation of creating a European wide, harmonised covered bond definition for regulatory purposes.”

The NordLB spokesperson meanwhile noted that the wider group will continue to issue covered bonds, notably Pfandbriefe.

“NordLB will also continue to develop its sustainable profile, a topic that is of high and increasing importance to us,” he added. “For example, financing in the field of renewable energies remains a core business area of the bank. As part of NordLB’s fundamental transformation, the green bond strategy will also be further developed within the group.”

NordLB CBB was formed in 2015 when the group merged specialist covered bond issuer NordLB Covered Finance Bank with then parent Norddeutsche Landesbank Luxembourg, with private banking activities at the time having been carved out and transferred to a new Luxembourg subsidiary of NordLB.