This week’s first ever Pfandbrief backed by aircraft mortgages has been warmly received. But amid the fanfare for the issuer, NordLB, there are concerns over the security of the assets involved that in turn are stoking debate over what assets should be eligible for covered bond funding.
Flugzeugpfandbriefe do benefit from security laws the US bankruptcy code and the Cape Town Convention, which governs how lenders can enforce security over aircraft.
However, traditional Pfandbrief pools cap the percentage of assets originated outside the European Economic Area. This is because non-EEA jurisdictions might not recognise a German court ruling on the Pfandbrief privilege. And since planes tend to fly around, enforcement might take place anywhere.
Investors also implicitly believe the German government would step in and rescue any Pfandbrief at risk of default, seeing it as a public policy asset. But would German taxpayers be as likely to cough up for a plane stranded in Somalia as for mortgage and public sector assets?
The financing also embodies a regulatory arbitrage. Aircraft mortgages, which often yield more than 200bp over Euribor, are being financed with bonds that, courtesy of the Pfandbrief label, pay 55bp. Savings banks within the borrowers own network can even buy these bonds without incurring a capital charge.
Germany has always been the biggest defender of a narrow definition of what could go into covered bonds traditionally, just mortgages and public sector loans.
It has deviated from that orthodoxy to admit aircraft mortgages. These now comply with the Undertakings for Collective Investment in Transferable Securities (Ucits) rules because there is a special regulatory framework. However, they are not yet recognised as eligible for covered bond treatment under the Capital Requirements Directive.
But if aircraft mortgages are allowed into covered bonds, why not small business loans? There is a clear need throughout Europe to finance SMEs. Roll on Mittelstandspfandbriefe!