Because we can: Ship Pfandbriefe
Pfandbriefe (covered bonds) are established and reliable financial instruments that play an important role in the refinancing strategy of many German banks. We use Pfandbriefe for refinancing and we are not only regularly active in the broad Real Estate Pfandbrief market, but we also issued the rather rarer variant of a Ship Pfandbrief at the beginning of the year. In this article, our Head of Treasury Christian Finck, and Markus Hartel, Head of Cover Pool Management, explain what makes Ship Pfandbriefe collateralized by container ships, bulk carriers or tankers so special and why they are of interest to investors and issuers alike.
02. August 2024 | Reading time 5 minutes
Why Pfandbriefe are Valued by Investors and Issued by Banks
Pfandbriefe are collateralized, fixed-interest securities that are backed by first-class assets such as real estate or ships. Originally developed in Germany, the Pfandbrief has a long history and provides banks with a stable and low-cost source of funding compared to other instruments. For investors, the Pfandbrief is an attractive and, above all, very safe investment option, as the German Pfandbrief Act provides a clear institutional framework with high standards.
What investors like about Pfandbriefe:
- Safety: Pfandbriefe are backed by first-class assets and are subject to a strict legal framework, making them a very safe form of investment
- Attractive yields: Pfandbriefe often offer higher yields than comparable government bonds with a similar level of security
- Market liquidity and diversification: The well-established Pfandbrief market in Germany and Europe offers high liquidity and targeted investment diversification
„Pfandbriefe are first-class collateralized and often offer better interest than comparable government bonds”
Christian Finck, Head of Treasury
Pfandbriefe also offer numerous advantages for the issuers – the German Pfandbrief banks:
- Stable source of funding: High-quality collateralized covered bonds are stable and allow banks to raise capital at comparatively favorable conditions
- Long-term planning predictability and diversification: Pfandbriefe enable precise liquidity planning, effective asset-liability management and contribute to the funding mix of banks
- Strong ratings: Rating agencies generally rate Pfandbriefe in the high “A” range due to their high credit quality and strict legal framework, which increases their attractiveness and placement opportunities in the market.
Hamburg Commercial Bank with first Ship Pfandbrief Issuance in 2024
The Ship Pfandbrief under the German Pfandbrief Act is a special type of Pfandbrief that has been issued rather rarely in recent years. Although Pfandbrief-like products are issued in other European countries, the number of issuers there is also limited, so there are not many ship-backed bonds on the markets. One reason for this is the financial crisis in 2008, which led to overcapacity and high default rates in ship finance and caused several banks to withdraw from the business. But even in times of crisis in the cyclical shipping market, no ship Pfandbrief has ever defaulted.This is because the strict requirements of the Pfandbrief Act ensure the high quality of the ship mortgages in the cover pool and also that the pool is very well filled at all times.
Ggf. eingerücktes Zitat: „ Even in times of crisis in the cyclical shipping market, no ship Pfandbrief has ever defaulted,” says Christian Finck, Head of Treasury at HCOB.
Ship financing is an important core business area for Hamburg Commercial Bank and forms a part of its diversified business approach alongside real estate, project and corporate finance. In January 2024, for example, the bank issued an EUR 500 million Pfandbrief backed by ship mortgages, which was rated with a very good “Aa3” rating by Moody’s. The order book for the ship mortgage bond was significantly oversubscribed at more than four billion euros, impressively demonstrating that investors recognize HCOB’s expertise both in the maritime sector and as a regular issuer on the capital markets.
Safe is Safe
Ship and Real Estate Pfandbriefe are subject to the same strict regulatory framework. However, there are also differences between the two variants, for example in the requirements for the underlying loans, the calculation of the mortgage lending value and the minimum limits for the over-collateralization of the Pfandbrief pool. In the case of Ship Pfandbriefe, the collateral consists of mortgages on various types of vessels, such as container ships, bulk carriers and tankers, as well as inland waterway vessels. Due to the cyclical nature of the global shipping market, timely, ongoing and detailed valuation of the vessels is a high priority, and strict requirements are placed on the ship mortgage loans in the cover pool:
- The ships must be entered in a public register and must not be older than 20 years at the time of repayment of the loan.
- Each vessel must be insured for at least 110% of the outstanding loan amount.
- Ships registered abroad can only be pledged if the law of the country of registration offers security comparable to a ship mortgage under German law.
As with Real Estate Pfandbriefe, a maximum of 60% of the calculated mortgage lending value is accepted as collateral for the Ship Pfandbrief.
Independent Valuation and Inspection
The valuation and inspection of ships are key elements for the quality and security of the cover pool for Ship Pfandbriefe. On average, the ships financed by Hamburg Commercial Bank are valued more than three times a year. The valuations are carried out by external, international brokers and then checked internally for plausibility in order to have an up-to-date and reliable picture of the shipping market and general vessel values at all times,” says Markus Hartel.
Regular inspection of the vessels is also essential. Every year, part of the fleet is inspected by external experts to assess its condition. Internal staff, who are independent of sales, then check the plausibility of the assessments to ensure that they are as objective as possible.
Conclusion: Pfandbriefe play an important role in the financial world. Investors benefit from conservative valuation approaches and a strict legal framework that guarantees the high quality of these bonds. For banks, they are a stable source of funding and contribute to diversified refinancing. Although Ship Pfandbriefe are rarely issued, they are popular with investors.