Issuer: Rheinische Hypothekenbank
Amount: €10 billion
Launch: October 1997
Arrangers: Commerzbank, Morgan Stanley Dean Witter
The MTN market may be a young pretender in the international capital markets, but at Rheinische Hypothekenbank (Rheinhyp) it has a very familiar feel. “Effectively we have been an MTN issuer for 125 years,” says treasurer Georges Ruchti.
An impressive claim given that the Euro-MTN market celebrated its tenth birthday only last year. But Ruchti points to the frequent-borrower privilege enjoyed by mortgage banks under German law. “We can issue any securities in the domestic market without documenting the issues except through terms and conditions,” he says. “That is exactly what happens in the MTN market.”
Now Rheinhyp is on the verge of entering the market for real. A €10 billion programme is signing later this month, and with it the bank will bring a new dimension to the Euro-MTN market: the option to issue Pfandbriefe off its programme.
“We always had in mind the idea of being able to duplicate our domestic practices in the international market,” says Ruchti. As Rheinhyp has Pfandbrief outstandings in excess of Dm60 billion ($33.5 billion), a programme without a Pfandbrief option would be a pale imitation of its domestic borrowing.
Rheinhyp was the second bank, behind DePfa, to launch a global Pfandbrief, issuing Dm2 billion in July 1996. Its experiences promoting this and subsequent international Pfandbrief issues persuaded the bank that there was a deeper and more diverse demand for the product than that catered for by the jumbos and globals.
International investors were very interested in the product, but wanted a different currency or maturity than was being offered in the global issues. There was also demand for the type of structured Pfandbriefe that Rheinhyp issues in the domestic market but which lack the documentation that many international investors require.
Because Rheinhyp’s Pfandbriefe are collateralized to triple A standard by the pool of mortgages or loans on which they are secured, investors are able to get pure structural risk – credit exposure is not an added concern. “Suddenly an MTN programme didn’t seem like a new product, or a financial innovation, but like the logical step into the international financial markets. Nothing more than a contractual frequent-borrower agreement,” says Ruchti.
By the end of 1996 Rheinhyp was looking seriously at setting up an MTN programme that would allow it to issue Pfandbriefe. The bank could find no legal reason why such an option could not be included, and so on December 20 it invited investment banks to submit proposals to arrange the programme.
“The initial reaction was very positive,” says Ruchti. “I think that they [MTN arrangers] have found that marketing the MTN idea to German mortgage banks hasn’t been the easiest of tasks. They welcomed our view that it is in fact nothing different from what we have been doing in the domestic market all along.” Rheinhyp will be only the fourth of Germany’s mortgage banks to enter the Euro-MTN market.
In mid-February 1997, it selected Commerzbank and Morgan Stanley Dean Witter (MSDW) as co-arrangers of the programme. Commerzbank, which holds a near 100% share in Rheinhyp, is the leading bank in the domestic Pfandbrief market, while MSDW is one of the most experienced arrangers of Euro-MTN programmes. The two banks also have experience of working together, having been joint bookrunners on both the first-ever jumbo Pfandbrief (for Depfa) and the first US dollar global Pfandbrief, where Rheinhyp was also the issuer.
Originally projected to be finished by mid-summer, the programme was delayed by Rheinhyp’s US dollar global Pfandbrief, which tied up some of the bank’s internal resources. Ruchti is now confident that it will be finished by the end of this month.
However, it seems unlikely that the other German mortgage banks which are already MTN issuers will be rushing to include a Pfandbrief option on their programmes. Neither Depfa nor Bayerische Hypotheken- und Wechsel-Bank are seriously considering the idea. Standardized documentation is already used for jumbo issues, and, with a single European currency only 18 months away, some take the view that issuing foreign-currency Pfandbriefe has little long-term benefit.
But Hans Jorg Schuttler, executive director at MSDW in Frankfurt, thinks that Rheinhyp is taking the right approach. “It is a worthwhile exercise with a lot of potential upside. Mortgage banks can integrate the domestic and international aspects of their business, and they are beginning to see that there is more potential in the international market than they realized.”
But at Commerzbank, vice-president Edward von Reden admits that Rheinhyp’s initiative is something of a leap in the dark: “You have to explore the possibility. If, after two years, it hasn’t worked, then we will be the wiser for it. But not to try it is not the right way to progress.”
There is general optimism in Germany that in a single European capital market, Pfandbriefe will become a major sector. “It is a good idea to gain more flexibility, especially with a view to the new market in euros,” says von Reden. “If people can get accustomed to investing in Pfandbriefe, then I can see an international appetite for smaller tranches developing.”
Schuttler agrees: “You can either look at Pfandbriefe as a special product, or simply as a higher-quality product than unsecured debt. If you want to do a structured trade, say a Tec 10-linked note denominated in French francs, then you could take an unsecured note from a triple A rated Landesbank. But you could also take a triple A Pfandbrief, issued off an MTN programme. It gives you another option, and perhaps a more competitive one.”
The new MTN programme will mean the end to stand-alone Eurobond issues from the bank, although any global Pfandbriefe will continue to be documented separately. The bank will be keeping an open mind on structured trades: “Whatever investors are looking for, and whatever the arranger can handle, we will look at,” says Ruchti.
Although German mortgage banks have been slow to enter the MTN market, it is crowded with other German financial institutions. Ruchti acknowledges that competition for funds will be tough. With this in mind, three different issuers will be included on the front of the offering circular: Rheinhyp itself, its Netherlands-based funding arm and its independent banking operation based in Dublin, Rheinhyp Europe. This, thinks Ruchti, will give the name added appeal: “An investor can complete one due diligence and have a rating range from Aaa to Aa3 to choose from.”
So just how many investors will choose the triple A attraction of a Rheinhyp MTN Pfandbrief?
