Since the loss of state backing two weeks ago, pricing for German pfandbriefe tied to landesbanks has tightened on the back of limited supply going forward (see ASR 7/25/05). Analysts at Dresdner Kleinwort Wasserstein said that three to five year landesbank jumbo pfandbriefe have come in by two to three basis points since the deadline passed.

While certain pfandbriefe were grandfathered in, non-guaranteed pfandbriefe were issued between July 19, 2001 and July 18, 2005 and mature after Dec. 31, 2015. "The rapid tightening demonstrates the performance potential generated when the supply pipeline is cut off," reported DrKW analysts. "In the past we have repeatedly stated our opinion that grandfathered landesbanks jumbo spreads could tighten midterm and that the potential for a set back was limited."

Standard & Poor's said in a report on the sector published last week that since highly rated unsecured debt is no longer available to the Landesbanks, these entities will increasingly draw on alternate sources of funding. "Two alternate funding sources for Landesbanks are covered bond issuance or traditional asset securitizations," reported S&P analysts. "Many Landesbanks' covered bonds rated by S&P are already based on a structured finance approach, which enables them to achieve AAA' ratings despite the loss of the guarantees."

Austria, Germany's next-door neighbor, faces a similar fate and is set to loose state backing in 2007. The Austrian Landesbanks, Landes-Hypothekenbanks, will benefit from financial indemnity until April 1, 2007. Analysts at DrKW said that though the consequences of the guaranty abolition should be less dramatic there, significant changes are expected in the run-up to the loss of state guaranty. "In principle, the abolition of the guarantees should have less of an impact on Austrian Landes-Hypothekenbanks' strategy than the loss of the guaranty mechanisms had on Germany's landesbanks: Since the former act as regional universal banks, they are likely to be less dependent on capital-market refunding than their German counterparts, which means the cost increase could initially be limited," said analysts at the bank.

In fact, DrKW analysts see some upside potential in Austria and said that the abolition of the guaranty mechanisms could positively impact secured refunding. Analysts reported that refunding becomes more advantageous as issuers move down the rating spectrum so Austrian Landes-Hypothekenbanks are likely to consider issuing more covered bonds going forward. Recent changes to the legislation governing Austrian Pfandbriefe, which has, among other things, collectively increased the protection against bankruptcy and thus the ratings, is likely to support this trend, reported analysts.

Similar to the procedures in Germany, Austrian Landes-Hypothekenbanks will be given a four-year transition period and a grandfather clause is in place where obligations issued up to Apr. 2, 2003, will continue to benefit from the backing until maturity. Those completed on or after Apr. 3, 2003 through Apr. 1, 2007, as long as the maturity is no later than Sept. 30, 2017, will also be grandfathered. Obligations completed after Apr. 2, 2007 will stand alone.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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