The issue attracted a high proportion of overseas buyers and is likely to be followed by other transactions. By Lydia Westrup
Deutsche Bank has made history by issuing the country’s first mortgage-backed securities. Housing loans totalling DM 1.4bn have been taken off the bank’s balance sheet into a separate company which issued bonds. The loans represent 2.65% of Deutsche Bank’s stock of housing loans that are secured on second and third mortgages.
The issue is cut into six tranches with various risk categories and interest payments. About 91% of the securities carry a AAA rating from the major rating agencies. The strong rating was achieved as the underlying assets are considered a lower risk than mortgage loans on commercial properties. US, British and German institutional investors bought around one third each of the bonds.
The issue is only the second asset-backed bond to be sold since German banking regulators gave commercial banks the authority to securitise their assets a year ago. Commerzbank is among a number of other players reported to be preparing similar issues.
German Landesbanks and mortgage banks have always been able to finance their property lending by issuing bank bonds and mortgage bonds (Pfandbriefe). These Pfandbriefe are secured on first-tier mortgages, where the loan to value ratio is 60% or less.
Though Pfandbriefe are a cheaper source of funding than mortgage-backed securities, observers see the two instruments in a complementary role. While the Pfandbrief will continue to be an important source of financing, the securitisation route has clear advantages when it comes to funding loans secured on second- and third-tier mortgages.
In addition, these assets will be taken off the balance sheet and need no longer be considered for the calculation of capital adequacy ratios, thus freeing resources for new lending. As German banks are looking for ways to improve their return on capital, balance sheet management will be an important tool to achieve this goal.
