This is what happens when the rating agencies mess with the sanctity of the German covered bond - the Pfandbriefe.
From the German Bundestag:
Pfandbriefe “das sicherste Wertpapier am Kapitalmarkt”
Berlin: (hib/HLE/AW) Wenn eine Pfandbriefbank in die Insolvenz geht, fallen die Deckungswerte für die von dem Institut herausgegebenen Pfandbriefe nicht in die Insolvenzmasse. Trotz der Insolvenz der Bank würden deren Pfandbriefe auch nicht fällig, schreibt die Bundesregierung in ihrer Antwort (16/13823) auf die Kleine Anfrage der Fraktionen von CDU/CSU und SPD (16/13713).
Roughly translated: ZE PFANDBRIEFE IS ZE SAFEST ASSET ON THE CAPITAL MARKET AS A REZULT OF ITS STATUTORY REQUIREMENTZ. GOT ZAT?”
Needless to say, this is an interesting line for the German government to take — considering that it implies that Pfandbriefe are safer than even, say, the German government’s own federal bond — the bund.
The statement basically emphasises that when a Pfandbrief-issuing bank goes bankrupt, its covered bond assets don’t fall into the same insolvency. The bank’s bankruptcy administrator has no power over the covered bond assets — they are ring-fenced and controlled only by a specially-appointed attorney. Thus Pfandbriefe investors should be doubly protected — from default on the underlying collateral and from default of the issuer.
The above statement is part of a wider enquiry (actually a “kleine Anfrage” or short enquiry in German) prompted by the country’s ruling coalition political parties. The politicians wanted to clarify Pfandbriefe rules, arguing that the safety of the bonds had been called into question in the course of the financial crisis, and viz the problems at Hypo Real Estate. Ratings agencies, the parties claimed, had also scared the market (”verunsichern damit den Markt”) in recent months.
Here’s some commentary from the credit analysts at Dresdner:
The government’s reply describes in detail the Pfandbrief Act regulations on bankruptcy remoteness of the collateral pools and the procedures in the event of default. It thus provides useful information for all investors and other market participants who wish to gain deeper insight into such a ‘what if’ scenario. Naturally, the statement is likely to have been prepared in close co-operation with corresponding interest groups and largely driven by political considerations. The latter is obvious not only from the pointed remark concerning the rating agencies but also from the fact that the inquiry was initiated by the governing parties themselves rather than by the opposition, which is usually the initiator of ‘troublesome’ inquiries.
However, this should not undermine the value of the government’s general commitment to the Pfandbrief product: Back in October 2008, it had already virtually provided an implicit guarantee for the product by announcing that it would adopt short-term statutory measures to secure German Pfandbriefe where the functioning of the market so required and that no Pfandbrief would default (see Pfandbrief Weekly of 15 October). This recent statement once again proves the strong systemic support benefiting the German Pfandbrief, which is a very important positive credit factor for investors, in our view.