4 questions for Patrick Steeg, Head of Asset Liability Management at LBBW

The Pfandbrief has always been quite resilient during crises and has proven to be a safe haven instrument for investors and issuers. Differences in valuations of specific funding instruments are all the more important during times of volatility. For example, Pfandbriefe currently have a very cheap and strong rival in TLTRO III – in particular Tranche 4. As a result of the negative yields in the Euro zone, there is currently no public market to speak of for covered bonds with short maturities of up to three years. In the current situation, the ECB’s TLTRO III offering is therefore very attractive for institutions – especially under the special terms and conditions approved by the ECB in early April for a limited period of time. In order to benefit from the allocation, issuers have turned in their own Pfandbriefe to the ECB as collateral. Liquidity is multi-faceted. In addition to the pure impact on liquidity, in recent years there has been a particular emphasis on regulators’ and rating agencies’ minimum requirements for own funds and eligible liabilities (MREL).

Within the capital structure, the Pfandbrief is the cheapest instrument for long-term funding and has the lowest level of execution risk. The bottom line, therefore, is that the Pfandbrief is a highly liquid instrument that is particularly well suited for the purposes of cost-optimised duration management.

In Europe, more than EUR 100 billion of retained, or own-use, Pfandbriefe and covered bonds were submitted to the ECB during the first half of the year. This proves that, for issuers, the use of covered bonds as collateral for ECB open market operations is currently the most efficient way to hold balances with the central bank.
Compared to potential direct purchases by the ECB under various ECB purchase programmes, using retained Pfandbriefe as ECB collateral offers the advantage of a high level of flexibility in asset-liability management. Therefore, participation in TLTROs with retained Pfandbriefe as collateral is not surprising, as it is cheap for issuers and entails no market execution risk. In our view, however, the allocation of more than EUR 1.3 trillion in the June TLTRO tranche will also be reflected in volumes of Pfandbriefe and covered bonds coming to the market particularly in the second half of the year.

ESG Pfandbriefe can help to achieve several objectives, whether climate targets or, looking to the future, social bonds for overcoming the COVID-19 crisis. We believe that LBBW has the necessary potential for cover assets in real estate financing and renewable energy. For LBBW, sustainability plays a central role. Currently, however, our attention is more on the unsecured segment, where the cost advantages of a green deal are most likely to be relevant. So that segment is our main area of focus. Nevertheless, we still have plans for green Pfandbriefe.

In addition to all the other current challenges, we are focusing heavily on further developing our issuance programmes. In our view, whenever a foreseeable market window has opened up, it has always proven worthwhile to approach the market with a successful transaction that satisfies everyone involved.