Quiet Success

By McCrary, Ernest | Global Finance, November 1997 | Go to article overview

Quiet Success


McCrary, Ernest, Global Finance


No one expected the Pfandbrief market, which is growing into one of Europe's largest and most secure bond markets, to be as successful outside of Germany as it has proven to be. Pfandbrief issuers met in Frankfurt to discuss these developments, with Global Finance's Ernest McCrary moderating.

GLOBAL FINANCE: Can you explain how you see the jumbo Pfandbrief market today and how it's developing?

FRIEDRICH MUNSBERG, head of treasury, FHC: The jumbo Pfandbrief market has grown astonishingly fast. By the end of 1998 the jumbo Pfandbrief market should reach some DM300 billion. At the moment it's around DM210 billion. The first jumbo Pfandbrief was traded only two years ago, and is already a big factor in the German capital market.

CARSTEN TEGTMEIER, head of international sales, Nord/LB: Two years ago when this market began, few imagined so strong an acceptance and the chance to see jumbo Pfrandbriefe in currencies other than Deutschemarks so soon. The true internationalization of the Pfandbrief product took place this year. Recently, Deutsche Borse AG introduced the JEX, an index for jumbo Pfandbriefe. A jumbo future contract should be implemented by mid-1998.

NIKOLAUS GIESBERT, head of Deutschemark fixed-income trading, HSBC Markets: To address the international investor base, one should consider issuing Pfandbriefe in non-Deutschemark currecies. Further nonDeutschemark issues, similar to the first Sterling benchmark issue that we launched last month, are expected.

OLIVER BERGER, deputy head of international funding and public sector lending, Rheinhyp: The reason for going international and issuing in foreign currencies can only be to broaden the investor base. Internationalization is a nice word, but the Pfandbrief has yet to be truly internationalized. What we have created over the last year is an awareness among investors abroad that there is such a product as the Pfandbrief. The steps which have already been taken are by a small group of mortgage bankers and issuers. I agree that we will see internationalization of the Pfandbrief market in 1998. But it's not there now.

RALF BUSCHMANN, head of origination, German financial institutions, Deutsche Morgan Grenfell: What has helped to internationalize this once purely domestic market is its first-class ratings. Reports from ratings agencies and information about the credits and securitization give international investors much more comfort about buying the product.

GF: How can you refine the Pfandbrief product, and what elements are needed to truly globalize it?

MUNSBERG: The market still needs to develop a liquid repo market to give investors who do not invest equity capital a means to obtain cheap funding for their positions. In addition, a repo market is necessary for marketmakers to cover their short positions. The typical German mortgage bank is not very innovative, so what used to happen is that one party, one institution, went forward and everyone else followed.

We brought out the first jumbo Pfandbrief in May 1995, and within a couple of months many others jumped on the bandwagon. Now we have a huge jumbo market. That also happened with the non-Deutschemark Pfandbrief. We have issued Pfandbriefe in French francs, and now we have six or seven foreign currency Pfandbriefe outstanding. We were also the first to have supplemented our recent global Pfandbrief issue with a special repo facility. Our six marketmakers in this issue have quoted twoway repo prices.

MANFRED LUDWIG, director of debt markets, Merrill Lynch: The repo market doesn't really work without good, solid primary placement. You need very good distribution to know where the bonds will be sold. International investors are much more used to taking advantage of bond entries for repo purposes, so it's important to involve international investment houses in order to make this market more efficient.

GF: How could the issuing process be refined to make Pfandbriefe more accessible, more internationalized? …

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