"Jumbos" celebrate anniversary
Given that the Pfandbrief celebrated its 250th anniversary last year, the jumbo Pfandbrief is still comparatively young in years. It’s only been 25 years since the first large-volume Pfandbrief came onto the market.
The pioneer then was Frankfurter Hypothekenbank, issuing on May 26, 1995, a public Pfandbrief in the amount of DM 500 million that was topped up to DM 1 billion a few months later – a volume considered sensationally high at the time.
The second large-volume Pfandbrief issue followed on July 27, 1995, brought this time by Bayerische Vereinsbank. It was when marketing this mortgage Pfandbrief, the volume of which was increased a few months after being issued from initially DM 500 million to DM 2 billion, that the prefix “jumbo” first came into use.
Whereas, to begin with, the term “jumbo” referred to Pfandbriefe with a volume of DM 500 million or more, the introduction of the euro saw the minimum volume raised to EUR 500 million. When the Association of German Mortgage Banks (VdH), the predecessor of the Association of German Pfandbrief Banks (vdp), undertook the modernization of the minimum standards for jumbo Pfandbriefe in 2003, the minimum required size of a “jumbo” was doubled to EUR 1 billion.
In the following short interview, Sascha Kullig, Member of the vdp’s Board of Directors and Department Head of Pfandbrief, Capital Markets and Investor Relations, describes the rapid development of the jumbo Pfandbrief market since 1995.
How, in your view, has the jumbo Pfandbrief market developed since 1995?
In 1995 the jumbo Pfandbrief was the right instrument at the right time. The German federal government stepped up its capital market activities significantly after German reunification. At the same time, the capital markets became more international, new investors appeared and good secondary market liquidity gained in importance. The jumbo Pfandbrief was the German mortgage banks’ response to the changing market environment. With it they laid the foundation for the Pfandbrief and covered bond market as we know it today. The market grew rapidly, thanks also to the minimum standards for jumbo Pfandbriefe, which the VdH (now the vdp) developed in March 1996. By the end of 1996 the volume of jumbo Pfandbriefe climbed to more than DM 120 billion, and the market went on to reach its peak in mid-2003, with an outstanding volume of around EUR 420 billion. This success story attracted the attention of other countries to the product. Thus, it is certainly due in no small measure to the jumbo Pfandbrief that covered bonds are firmly established throughout most of Europe today and are generating more and more interest at the global level. The jumbo Pfandbrief is, moreover, a good example of how the reliable, traditional Pfandbrief can serve as a basis for creating outstanding innovations.
Jumbo Pfandbriefe feature in one-tenth of the Pfandbrief’s history spanning just over 250 years. How important are “jumbos” for the Pfandbrief market today?
The jumbo Pfandbrief has had a history characterized by change, including some difficult times, and the response has always been to adapt, for instance by amending the minimum standards. Whereas jumbo Pfandbriefe, i.e. large-volume Pfandbriefe with a minimum issue size of EUR 1 billion, accounted for around 36% of the total outstanding volume of Pfandbriefe in 2005, their share today is only in the region of 13%. There are a variety of reasons for this. For example, the outstanding volume of public Pfandbriefe, which once made a major contribution to the success of the jumbo Pfandbrief, has shrunk significantly since roughly the turn of the millennium. At the same time, legal provisions have been introduced which, to some extent, make it more difficult to issue jumbo Pfandbriefe. Cases in point are the net present value calculation of cover with interest rate and currency stress tests as well as, above all, the introduction of a liquidity buffer. Against this background, benchmark issues, i.e. large-volume Pfandbriefe with an issue size of at least EUR 500 million, currently play a far greater role. Yet it would be wrong to infer from this that the jumbo Pfandbrief faces extinction. It remains for many Pfandbrief banks an important refinancing instrument that satisfies the needs of major investors.
How has the economic crisis in the wake of Covid-19 affected the Pfandbrief market in general and “jumbos” in particular to date?
The Pfandbrief market got off to a good start in 2020. For one thing, three jumbo Pfandbriefe had been issued by the beginning of March. When the Covid-19 pandemic broke out in Europe, the placement of Pfandbriefe in the market at first came to a near-standstill. However, that was not because it was no longer possible to sell Pfandbriefe. Rather, the German Pfandbrief banks opted for the refinancing facilities available through the European Central Bank (ECB), which for them were considerably more favorable. To this end, they issued Pfandbriefe and used them as collateral with the Eurosystem. This also explains the, at first glance, seeming paradox of the high issue volume in 2020. According to the Deutsche Bundesbank, more Pfandbriefe were issued in the first five months of this year than in the same period one year before. That said, two jumbo Pfandbriefe and two benchmark issues were brought to the market in June 2020. This demonstrates that confidence in and demand for Pfandbriefe are intact.