German issuers expect demand for Pfandbriefe to pick up in the coming months and have meanwhile been enjoying the strongest demand for their unsecured debt since the Association of German Pfandbrief Banks (vdp) launched its Issuance Climate survey two years ago.

The last new euro benchmark German Pfandbrief was almost two months ago, a €500m long six year for MünchenerHyp, with the whole covered bond market having been subdued by challenging dynamics since then, as likely primary market levels have become unattractive.

On a scale from plus 100 to minus 100, vdp members assess over the past six months, the present, and coming six months a variety of drivers in the capital markets environment and their impact on issuance plans, and the asset swap spread level came in at minus 83 in the current survey.

“The Pfandbrief climate has been mostly dominated by the asset swap spread,” Sascha Kullig (pictured), management board member at the vdp, told The Covered Bond Report. “We have had an extraordinary development in the Bund-swap spread and this has had an impact on SSAs in particular – some Pfandbriefe were even quoted inside SSAs like KfW.

“The good news is that although this general trend is expected to continue, our member institutions expect a slight improvement when it comes to the spread development of Pfandbriefe.”

The asset swap score is at a still-depressed minus 72 for the next six months, but the score for oversubscription is foreseen rising 26 from minus 29 to minus 3, with the score for impact of the premium to Bunds improving from minus 24 to minus 14. The aggregate score for Pfandbriefe, at minus 18, is down on the minus 11 in the last survey, in June.

Source: vdp, Börsen-Zeitung, Grafik: www.igrafik.de

While covered bond issuance conditions may have been challenging, Pfandbrief issuers have benefited from the wider positive environment for unsecured bank debt in recent months. This even extended into Tier 2 for Aareal Bank, for example, which sold its first subordinated bond in over a decade in September, while more recently Deutsche Pfandbriefbank (pbb) on 20 November issued a €500m long three year green senior preferred.

The aggregate score of minus 8 for unsecured bonds in the latest survey is the highest of any of the five surveys conducted by the vdp since it began tracking issuance climate sentiment in December 2023.

Source: vdp, Börsen-Zeitung, Grafik: www.igrafik.de

“If you look at the development of sentiment on the unsecured side, it has improved consistently,” said Kullig. “Issuers therefore took the opportunity to issue quite a lot of senior preferred, senior non-preferred and even capital instruments like Tier 2.

“So the risk appetite is there in the market and the banks were able to issue unsecured bonds at really attractive price and spreads. This is most welcome and shows that trust in our member banks and business models remains, in spite of the difficult situation the mortgage market has faced.”

The score for present investor demand for unsecured debt, at plus 42, was the highest of any metric in the survey. It is also higher than the 27 registered for demand in the past six months, although investor appetite is expected to moderate in the next six months, with a neutral score of zero.

The development of interest rates is expected to weigh on issuance conditions in the first half of 2025, registering a score of minus 70 for the overall market. The European Central Bank continued its rate-cutting cycle last Thursday (12 December), but the opinions of those surveyed vary on the degree of further easing, with some expecting the deposit rate to be cut no more than 75bp but others anticipating more than 150bp over cuts in the year ahead.

Volumes positive, supported by business

Benchmark Pfandbrief issuance this year totalled some €29.8bn, and around €35bn is expected in the 2025.

“This year was lower than in the last two years,” said Kullig, “but the last two years were extraordinary regarding issuance activity – it’s still higher than in the years up to 2018 and we expect decent activity in the benchmark segment next year.

“The interesting question is whether we will see the typical pattern of a huge part of this being done in January, or whether it will be different this year. Maybe some banks will start with senior instead of covered – although there are those who say senior spreads are too tight compared to Pfandbriefe.”

Overall 2024 Pfandbrief issuance came in around the €50bn level forecast by vdp members at the start of the year, and they now expect issuance of a similar magnitude in 2025, €49.4bn. This would represent net growth of €3.6bn, putting the German sector on track to extend its continuous growth since 2019.

“Moderate growth in lending will likely give rise to a corresponding need for issuing activity,” said Kullig.

The score for lending business to be refinanced came in at plus 33 for the next six months, the second highest for any question in the questionnaire and sharply up from minus 32 in the last survey.

“If you look at the figures we disclosed just recently on the lending business, it was overall still quite muted,” said Kullig, “so the expectations six months ago of our member institutions were in fact right. This has changed now.

“Nevertheless, there’s a huge difference between residential and commercial lending. While residential lending increased 16% in the first three quarters of 2024 compared to the first three quarters of 2023, activity on the commercial real estate side declined further and we expect this situation to continue.”

Source: vdp, Börsen-Zeitung, Grafik: www.igrafik.de