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Covered bonds: LBB looks outside Pfandbrieffor issuance

Structured covered bond may be repeated by other German issuers.

Landesbank Berlin AG (LBB) plans to issue structured mortgage covered bonds under its Daheim Nr 1 covered bond programme. This is the first time that a German financial institution has issued covered bonds under general German law, and outside the ambit of the Pfandbrief act.

Although the bank says that it originated the structure on its own, a fortuitous consequence is that it could be used by numerous other institutions in Germany: namely, smaller savings banks.

"Applying for LBB’s own Pfandbrief privilege, we realized the costs and effort involved in order to meet all requirements under the Pfandbrief act," says Christian Scheibe, director in LBB’s treasury department. "These costs are too high for smaller banks. So we came up with the idea of utilizing these mortgages for a structured covered bond, which is basically a secured bearer bond."

The Pfandbrief is the leading product in the covered bond universe but the rigid legal framework often makes it too complicated and costly for smaller institutions to implement. LBB’s structured covered bond will enable these banks access to the kind of cheap funding available to covered bond issuers.

"The first issue under the new programme will be a test transaction, backed by LBB’s assets, to show the product to small savings banks and investors," Scheibe told Euromoney.

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