Covered Bonds - DG Hyp
Covered Bonds - DG Hyp
Covered Bonds - DG Hyp
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<strong>DG</strong> HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009<br />
cannot be serviced in a timely manner due to liquidity gaps, he is authorised to furnish cover<br />
assets as collateral and take out a loan to bridge the liquidity bottleneck.<br />
If the collateral manager/receiver determines however that the intrinsic value of the assets<br />
as a whole is no longer sufficient to permit the full satisfaction of the pfandbrief creditors,<br />
separate insolvency proceedings must be opened in respect of the respective special funds<br />
(cover pools). This means in plain English that the collateral manager/receiver has to begin<br />
to liquidate the cover pool. In a „normal“ market environment, the search for potential buyers<br />
for the cover assets would probably be a fairly straightforward proposition. In the light of the<br />
current banking-sector crisis however, we could see this turning out highly problematic.<br />
Heavy mark-downs might be needed even to sell the regular cover assets that back publicsector<br />
pfandbriefe considering the present unattractive margins on state-finance business.<br />
We see selling mortgage loans as the biggest problem, however, when the financial crisis is<br />
badly undermining their market value and potential buyers are short of spare capital<br />
anyway. In the context of a pfandbrief bank insolvency, the circle of potential cover pool<br />
buyers is likely to be very small indeed. In this worst-case scenario, the buyers could exploit<br />
this dire situation to force the price of the loans portfolio even lower. Although the pfandbrief<br />
creditors have an equal right to the bank’s insolvent estate as the holders of unsecured<br />
claims in respect of the value of the claims that cannot be satisfied from the cover-pool<br />
liquidation proceeds, full repayment is hardly to be expected in this extreme scenario.<br />
Pfandbrief regime not designed for extreme cases<br />
Although the German pfandbrief legal regime apparently cannot protect pfandbrief creditors<br />
against an (admittedly small) loss in this worst-case scenario, we have to remind readers at<br />
this point that the Pfandbrief Banks Act was never originally designed to cope with a<br />
systemic crisis. We also believe that, considering the likelihood of mutual support within the<br />
pfandbrief community and the implicit government guarantee provided for pfandbriefe in the<br />
German rescue package, things are never likely to come an actual liquidation of a cover<br />
pool.<br />
Cover pool separated from bankrupt estate in insolvency scenario<br />
Bank balance<br />
Bank balance<br />
Assets solvent Liabilities Assets insolvent<br />
Liabilities<br />
Mortgage portfolio<br />
100<br />
Cover pool<br />
60<br />
Other assets<br />
Source: DZ BANK<br />
Other<br />
liabilities<br />
45<br />
Pfandbriefe<br />
55<br />
Equity<br />
Mortgage portfolio<br />
40<br />
Other assets<br />
Cover pool<br />
The collateral manager/receiver as the trusty guardian of creditor protection?<br />
60<br />
Other<br />
liabilities<br />
45<br />
Equity<br />
Pfandbriefe<br />
55<br />
Liquidating the cover pool no easy<br />
task in the current market<br />
environment<br />
Worst‐case scenario<br />
27