ANALYSIS: How low can Pfandbrief coupons go?

Can Pfandbrief coupons get any lower? Germany’s popular covered mortgage bonds have long been popular with investors due to their high degree of safety but, as coupons shrink, investors are starting to query whether they are moving towards the ‘Nega-Coups’ offered by two-year German Bunds.

‘What happens with Bunds can happen with Pfandbriefe (negative coupons on two-year German Bunds),’ said Markus Kreuter, team leader, debt advisory Germany at JLL. ‘Pfandbrief coupons are at historic lows. Based on the historic background, Pbb has offered slightly higher coupons than some of the other German lenders. If Pbb’s coupon is 0.2%, it is a sign of how low coupons have become.’

Earlier this week, German lender pbb Pfandbriefbank placed a €500 mln mortgage Pfandbrief. The six-year Pfandbrief offered a coupon of just 0.2%. Despite the low coupon, the issue was oversubscribed by about €200 mln. The issue was arranged by a syndicate comprising Commerzbank, DekaBank, NORD/LB, UBS Investment Bank, UniCredit und Bankhaus Lampe.

Coupons in the 0.2% range are not new to the market – in fact, some recent coupons have been even lower, at around 0.125%. ‘Even at 0.2%, Pfandbrief coupons will attract investors because of the competitive environment,’ said Kreuter.

This is because interest rates are moving towards zero and, in some cases, there is a danger of negative interest rates for deposits, he added. ‘It’s better to get 0.2% interest for Pfandbrief bonds than negative rates on your current account. For investors with a lot of capital, it’s about getting the money invested, which is one of the reasons for a historical €55 bn in deals in Germany last year. The Pfandbrief is still the most successful and popular refinancing tool in Germany. CMBS pricing continues to be higher than Pfandbrief pricing.’

Pfandbrief coupons are appreciated by investors, even when the interest on them is close to zero simply because they’re an important cog in capital markets, according to Michael Kröger, head of international real estate finance at Helaba in Frankfurt. Nonetheless, as bank stocks continue to fall across Europe, ‘re-financing becomes more expensive for everyone’, he said. ‘Credit default swap (CDS) spreads are in the three digits for blue chip companies, which is rather high, historically.’

Deutsche Bank was trading at just €15.04 on 25 February, down almost 53% since July. Similarly, Commerzbank was trading at €7.23 on 25 February, down from €12.05 in July.

There were €40.7 bn of mortgage Pfandbriefe issued in Germany last year, up 38.5% on the previous year and taking the total outstanding mortgage Pfandbriefe to €197.7 bn, according to the Association of German Pfandbrief Banks.