* Commerzbank new product risks failing to win over
* Investors seek triple-digit spread for SME-backed bond
* Structured approach could overshadow upcoming legislative
By Aimee Donnellan and Owen Sanderson
LONDON, Jan 30 (IFR) - European investors questioned the
merits and potential pricing of a planned SME-backed covered
bond from Commerzbank at the IFR covered bond conference in
Frankfurt this week, potentially stopping this revolutionary new
product in its tracks.
If Commerz is too aggressive on pricing and tries to push it
too close to the price for Pfandbriefe, this could backfire -
hurting development of a European small and medium-sized
enterprise (SME) covered bond market and Commerzbank's own plan
to return to Pfandbriefe.
Banks across Europe have been looking at SME covered bonds
for at least 18 months, as two trends have converged - political
pressure to lend more to SMEs and a shift towards collateralised
borrowing for banks.
But the product risks falling between two stools - too risky
for rates buyers, the natural investors for legislative
Pfandbriefe, and too tight for credit investors, who may be put
off by an attempt to match Pfandbrief spreads.
"This is the next natural step in the evolution of the
covered bond product," said a DCM banker.
"But in order to make this product appealing to the masses
Commerzbank are going to have to pay up, and we're talking about
more than double digits here," said a syndicate official.
If Commerzbank is successful, the new bank funding
instrument is expected to transform the SME market, which is
seen as the driving force in European job creation but has faced
scarce financing due to the eurozone crisis and the collapse of
Covered bonds have benefited from regulatory favour since
the crisis, with the ECB allocating EUR100bn to buy covered
bonds outright and setting haircut margins at favourable levels
against comparably rated securitisations.
And German Pfandbrief borrowers have benefited hugely from
the market's safe-haven status and perceived proximity to Bunds.
Over the past year, Pfandbrief pricing has returned to
pre-crisis levels as banks like Aareal, Deutsche Pfandbriefbank
and Deutsche Bank regularly offer single-digit spreads to borrow
cash over the short to medium term.
The differential between senior unsecured and covered bond
funding costs for a credit like Deutsche Pfandbriefbank is
currently around 130bp.
Commerzbank faces a number of challenges to price its
upcoming bond at the tight end of that differential. Most
importantly, investors are lining up to tell the bank that a
more securitisation-like structure means the instrument should
be priced closer to unsecured German bank debt.
"This should be priced closer to senior unsecured debt than
Pfandbriefe because it is not ECB eligible," said a German bank
treasury official who is active in the covered bond market.
Henrik Stille, portfolio manager at Nordea Investment
Management, shared that view but said that while he would like
to see a generous pick-up to senior, he expects it to be priced
closer to Pfandbriefe.
"The hope is it will price closer to Pfandbriefe than senior
unsecured debt," said Rainer Mastenbroek, head of covered bond
funding at Commerzbank.
"But this is not a dilution of the covered bond asset class,
which is a well-defined product. We think investors are grown up
enough to be able to distinguish between structured covered
bonds and Pfandbriefe.
However, syndicate and DCM bankers that spoke to IFR on the
sidelines of the conference cautioned the issuer.
"Commerzbank is also planning to sell a legislative
Pfandbrief this year, so it's very important for the SME product
to be priced right," said one.
Unsurprisingly, Commerzbank is planning to take a more
aggressive approach on pricing its new SME product.
"If the SME fails to win support, it could have a negative
impact on the bank's cost of funding through the Pfandbrief
market, which would be a disaster."
In the wake of an investor roadshow, Commerzbank officials
say they are confident the bank will gain the support it needs
for the product, but that it is not trying to pull the wool over
anyone's eyes by marketing this as a legislative covered bond.
"We expect to get a lot of interest for this product," said
"We went the structured route because SME loans are not
included in the German Pfandbrief law. Our client group has been
very receptive to the instrument and at the moment we are just
digesting feedback from our investor roadshow before we access
(Reporting by Aimee Donnellan & Owen Sanderson; Editing Alex
Chambers and Philip Wright)