New Pfandbrief Act introduces soft bullets, no grandfathering
On Thursday, 15 April 2021, the German Bundestag approved the amendments to the Pfandbrief Act, which was the final parliamentary hurdle. Probably the most important change is the introduction of a possible maturity extension (soft bullet) for pfandbriefe, which will come into force as early as 1 July 2021, also retroactively for all pfandbriefe already outstanding. In future, the cover pool administrator (or Sachwalter as administrator of the cover pool after the insolvency of the pfandbrief bank) will be able to extend the maturity of the pfandbriefe by up to twelve months if necessary. This will better secure the liquidity of the cover pool, which has already been positively noted by the rating agencies. This regulation supplements the cover pool administrator’s toolbox, who is also permitted, for example, to take out bridge loans, sell cover assets or issue new pfandbriefe to bridge liquidity bottlenecks. The directive requires that the redemption sequence of outstanding pfandbriefe may not be altered through the use of the maturity extension. This caused some headaches and was therefore regulated in quite detail in the Pfandbrief Act.
In our opinion, the regulations on liquidity reserves within the cover pool have turned out to be strict. The maturity extension for pfandbrief may not be taken into account when calculating 180-day liquidity needs (the legislator has also clarified that liquidity calculations must be made on the basis of time to maturity of the cover assets). Therefore, despite the future soft bullet, pfandbrief banks must not only maintain the necessary liquidity for upcoming coupon payments, but also for maturing pfandbriefe within the cover pool for the next 180 days. In other countries, a soft bullet reduces these liquidity requirements accordingly.
In Summary, the Pfandbrief Act was in many respects the model for the European covered bond directive. The need for adjustment in Germany was therefore quite manageable. Overall, in our view, the pfandbrief market should nevertheless benefit from the directive in the long term, because it creates common international quality standards that provide a solid foundation for the regulatory privileges of European covered bonds.
— Jörg Homey
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