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Gruner-Pfandbrief

15 April 2015
Richard Kemmish


So BHH is going to go green. At the time of writing they are on a roadshow mareting what will soon be the first ever ‘Green Pfandbrief’. Green in this case is used to refer to the quality of the collateral in the cover pool, all of which meets certain environmental criteria.

You may remember that last year Munich Hyp launched an ESG (Environmental, Social Governance) pfandbrief. I may mistakenly have referred to this as being Green, but hey, it’s not field of expertise. Thanks though to those of you who pointed out my mistake.

At the time there was some criticism, as there is with many such bonds, that as under German law every pfandbrief is backed by every mortgage in the pool, the fact that X% of the pool meets the ESG criteria, doesn’t mean that X% of the bonds do. It means that every bond backed by the cover pool does but by X%, not 100%.

The BHH pfandbrief will be no different. If the green mortgages were all mysteriously to default tomorrow your green bond would be repaid based on different coloured mortgages in their cover pool and by recourse to BHH. For that matter the money that investors will eagerly hand over will not be ring-fenced to originate new green mortgages (money held by the treasury of BHH is fungible after all).

Is there then any benefit in labelling a portfolio of mortgages as green and marketing a bond as such?
 
I would argue yes if there is a demonstrable benefit for the issuer from this type of bond rather than a regular pfandbrief, whether in terms of pricing or investor diversification. No matter which cash is used to originate which assets, what matters is whether at the margin, if BHH originate another billion euros of green mortgages, then overall they will get better funding for a billion euros of funding. Green bonds are an incentive to originate the assets that the investors buying the bond want to see originated. Job done.  

But therein lies the problem. In the current environment there is absolutely no economic benefit in the trade for BHH. Of course the deal will go well, of course it will price substantially through swaps, of course it will be heavily oversubscribed. But all of that applies to any pfandbrief that BHH decided to issuer in the current market environment. Or any pfandbrief from any issuer for that matter.

In the current market conditions there is no meaningful price mechanism to incentivise green mortgages and no shortage of investors, whether regular covered bond investors, green investors or (hopefully) a bit of both. 

Just as we complain that the ECBs actions have mispriced credit risk by flattening spread curves for different issuers, or have mispriced duration risk and inflation expectations by flattening the term structure of bond prices, so they now misprice the benefits of bonds with green credentials.

Which is a pity. But at least the bond will be an easy sell.

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