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Newcomers to the herd

Still big, but more sensitive

A potential threat to the development of an internationally recognized jumbo Pfandbrief market is the recent appearance of another jumbo product. Last August seven German Länder (states) joined together to issue a joint Dm4 billion ($2.6 billion) bond. This is the only such Länder jumbo to appear, although another is due in the first few months of this year.

The market criticized the first issue for its cumbersome syndicate structure and the poor communication between the arrangers. And some banks, both German and foreign, refuse to deal in it, preferring instead single-Land bonds. But this is still regarded as a viable way of funding the states because securitized borrowing should be able to offer them cheaper funding than they get at present. If these baby Bunds do succeed, it will be at the expense of the states' more traditional financing tool, the Schuldschein.

As Schuldscheine are the collateral for most jumbo Pfandbrief issues, there is a possibility that the Länder jumbos will seriously dent their rivals' prospects. "If the Länder jumbos do succeed, then a consequent lack of demand for Schuldscheine will filter through, and we'll see a perceptible reduction in the size and frequency of jumbo Pfandbrief issues," says Friedrich Munsberg, head of treasury at Frankfurter Hypo.

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