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CREDIT RISK TRANSFER AND TRADING

PERSPECTIVES OF CREDIT RISK TRADING AND TRANSFER IN THE

GERMAN FINANCIAL SERVICES INDUSTRY

by

Clemens Schun

A thesis submitted in partial fulfillment of

the requirements for the degree of

Executive Master of Business Administration

WHU-Kellogg Executive MBA Program 2004-2006

Academic Supervisor:

Prof. Dr. Markus Rudolf, Dresdner Bank Chair of Finance

August 17, 2006


Table of Contents

1 INTRODUCTION......................................................................................................................1

2 SURVEY OF CREDIT RISK TRANSFER INSTRUMENTS ..............................................2

2.1 Credit Derivative applications........................................................................................................................... 2 2.1.1 Risk reduction.................................................................................................................................................. 2 2.1.2 Diversification ................................................................................................................................................. 3 2.1.3 Risk design ...................................................................................................................................................... 4 2.1.4 Optimisation of the portfolio return................................................................................................................. 4 2.1.5 Hedge of a forecast transaction........................................................................................................................ 4 2.1.6 Funding arbitrage............................................................................................................................................. 5

2.2 Asset-Backed-Securities ..................................................................................................................................... 5 2.2.1 Motivation for ABS for the originator ............................................................................................................. 5 2.2.2 Motivation for ABS for the investor................................................................................................................ 7

2.3 Loan Sales ........................................................................................................................................................... 8

3 MARKET PARTICIPANTS.....................................................................................................8

3.1 Credit Derivatives............................................................................................................................................... 8

3.2 Asset-backed securities .................................................................................................................................... 11

3.3 Non-performing loans ...................................................................................................................................... 13

4 SOURCES OF INFORMATION ...........................................................................................13

4.1 Rating Agencies ................................................................................................................................................ 15

4.2 Transaction-related sources of information................................................................................................... 15 4.2.1 Information Memorandum............................................................................................................................. 16 4.2.2 Rating agencies’ pre sale reports ................................................................................................................... 16 4.2.3 Investor reports .............................................................................................................................................. 17

4.3 Market data providers ..................................................................................................................................... 18

4.4 Exchanges/brokers and other parties ............................................................................................................. 18 4.4.1 The Debt Exchange, Inc. ............................................................................................................................... 19 4.4.2 Internet credit trading portals......................................................................................................................... 19 4.4.3 Specialist pricing services.............................................................................................................................. 20

4.5 Securitisation Platforms................................................................................................................................... 21 4.5.1 Hypoport AG ................................................................................................................................................. 21 4.5.2 TXS financial products GmbH ...................................................................................................................... 21 4.5.3 KfW's Securitisation Programmes ................................................................................................................. 22 4.5.4 Hanseatic Securitisation Forum..................................................................................................................... 25 4.5.5 ABSNet.......................................................................................................................................................... 25 4.5.6 Reporting Online GmbH................................................................................................................................ 26 4.5.7 True Sale International (TSI)......................................................................................................................... 27

5 CREDIT RISK TRADING .....................................................................................................28

5.1 Trading across organizations .......................................................................................................................... 28

5.2 Internal transactions ........................................................................................................................................ 30 5.2.1 Sparkassen-Finanzgruppe .............................................................................................................................. 30 5.2.2 Finanzverbund ............................................................................................................................................... 30 5.2.3 Conclusion..................................................................................................................................................... 31


6 SHORTCOMINGS AND PERSPECTIVES FOR FUTURE DEVELOPMENT..............32

6.1 Descriptive Analysis ......................................................................................................................................... 33 6.1.1 German perspectives...................................................................................................................................... 33 6.1.2 Perspectives affecting different countries ...................................................................................................... 33 6.1.3 iTraxx Products.............................................................................................................................................. 35

6.2 Results from expert interviews........................................................................................................................ 36

7 CONCLUSION.........................................................................................................................39

8 BIBLIOGRAPHY ....................................................................................................................40

9 APPENDIX I: SCREENSHOTS.............................................................................................44

10 APPENDIX II: QUESTIONAIRES ...................................................................................53

CREDIT RISK TRANSFER AND TRADING Page 1

1 Introduction Until some time ago it was argued by cooperative and savings banks that there were hardly any

instruments suited for a targeted credit risk management, let alone a secondary market for those

instruments. Most recently however, this situation has changed dramatically courtesy of the

pioneering work being undertaken by various market players (e.g. DG Hyp in the cooperative

banking sector and various Landesbanken in the public sector).

Today capital markets and the available range of credit risk management instruments (credit

derivatives, securitisations, corporate bonds offer banks of all sizes and customer segments the

possibility to purposefully

• dismantle credit risks (i.e. decontration)

• invest in credit risks (i.e. take on risk)

and thus to restructure the as-is.

The implementation of modern credit risk instruments poses a challenge to banks, since it will have

implications for different departments (risk management, supervisory reporting, accounting…).

BaFin’s1 circular 18/2005 - Minimum Requirements for Risk Management (MaRsik) – explicitly

lay down binding prescriptions on the introduction of new products in banking entities. A central

prerequisite for a targeted realisation of credit risk management procedures is first of all the analysis

of the as-is. A credit risk model is used to assess the portfolio risk or credit-value-at-risk.

The objective of this master theses is to research the credit risk transfer and credit risk investment

opportunities from the perspective of medium-sized, regional banks. It is being analysed which

products are to be used for which objectives and the possibilities currently offered to banks by the

individual service providers (chapters 2, 3 and 4). On the basis of this analysis weaknesses and

shortcomings are being identified and an outlook on the expected developments is presented

(chapters 5 and 6).

The author wishes to express sincere appreciation to Mrs. Benk and Dr. Muck form the Dresdner

Bank Chair of Finance at WHU for their assistance in the preparation of this master thesis. In

addition, special thanks to Dr. Michael Lesko, Gillardon AG, whose familiarity with the needs and

ideas of credit risk transfer was helpful during the early programming phase of this undertaking.

Thanks also to the interviewees2 for their valuable input.

1 Federal Financial Supervisory Authority in Germany 2 See 6.2


2 Survey of credit risk transfer instruments Different instruments are at hand to adress different objectives in credit risk management: (1)

purchase / sale of part portfolios, (2) single credit derivatives, (3) basket credit derivatives and (4)

securitisations of different underlying pools. Which instruments are to be used depends on the

individual situation of a bank as well as on the defined objectives. While plain-vanilla credit

derivatives (e.g. CDS, CLN) are relatively simple products, basket-credit default-swaps or

securitisations are more complex credit structures.

2.1 Credit Derivative applications3

Stephen Ross tells us in his arbitrage pricing theory, or APT, that for any individual stock there are

two sources of risk. First is the risk that stems from the pervasive macroeconomic factors which

cannot be eliminated by diversification. Second is the risk arising from possible events that are

unique to the company. Diversification does eliminate unique risk, and diversfied investors can

therefore ignore it when deciding whether to buy or sell a stock.4 What holds true for equity, does

hold true for debt also. For institutions dealing with credit risk, a particular concern arises from the

fact that credit risk has both an idiosyncratic and a systematic component. Counterparty default may

arise as a consequence of factors unique to the borrower, such as poor management or bad luck.

However, it also may arise in the wider contexts of economic recessions, financial market crashes

and political turmoil. But it is risk diversification that poses a problem for regional/specialized

banks like Volkswagen Bank GmbH or a German savings or cooperative bank which by its statutes5

is confined to a local market. Diversification and other reasons for the usage of credit derivatives

are outlined below. At the same time, the section introduces the different types of credit derivatives

and thus forms the basis of this paper.

2.1.1 Risk reduction Sparkasse Gifhorn-Wolfsburg (total balance sheet TEUR 2.538.428 / liabilities to customer TEUR 1.950.881 / savings

deposits TEUR 847.931 / loans to non-banks TEUR 1.565.041) has high risk concentration with respect to the

automobile industry. Moreover, most of their private customers has a high correlation to the success of the main

employer of the region. The savings bank (i.e. protection buyer) therefore enters into 5-year credit default swap,

nominal EUR 500 million. Although the savings bank does not own a Volkswagen bond, the reference obligation is

defined to be a Volkwagen bond.6 This single specific reference obligation makes it easy to specify the event of

3 Conveying a deeper product understanding as well as details of the structure of instruments is not objective of this

master thesis; I would like to refer to the readily available amount of literature on the subject. The objective of this chapter is mainly to show the motivation and use of different credit risk transfer instruments.

4 Brealey and Myers (2003), p.205 5 § 8 of the statutes of KSK Daun reads: „Ausleihbezirk ist das Gebiet des Errichtungsgewährträgers und das Gebiet

der angrenzenden Landkreise”. 6 In general, the protection buyer does not have to own any debt obligations of the underlying reference entity to enter

into a credit default swap. This is one of the main differences between a CDS and a financial guarantee.


default. The settlement terms do not provide for physical settlement and involves a pre-agreed payment of 500 million

EUR on the occurrence of a credit event by the protection seller (e.g. Nord LB) to Sparkasse GW.7 In return for

assuming the underlying credit risk, Sparkasse GW pays an agreed premium of 0.5 million EURto the protection seller,

e.g. Nord LB, at yearly intervals.

Example 1 - Risk reduction through a credit default swap8

The potential credit events are usually based on the six specified in the 1999 ISDA Credit

Derivatives Definitions.9 These are: bankruptcy; failure to pay (principal or interest); obligation

default; obligation acceleration; repudiation/moratorium; and restructuring.

The inclusion of restructuring as a credit event in the contract protects the risk buyer only from that

sort of credit deterioration, that may lead to a restructuring and a potential change in the terms of

any outstanding debt. I.e., in Example 1 the risk of a deterioration of the earnings situation of

Volkswagen is not hedged. This referred to as basis risk. Even if Volkswagen is not bankrupt,

declined earnings will have an strong impact on suppliers and employees of the company. In this

situation defaults in the credit portfolio will occur more frequently. Normally, this should lead to

widening of the spread on Volkswagen. Credit spread options have a strike price based on a credit

spread above the risk free rate. The option will be exercised if the spread of the underlying

reference entity moves above or below this strike spread depending on whether the contract is a put

or a call option respectively. Credit spread options are not commonly traded. One reason for this is

that the determination of the volatility of the credit spread is difficult and this is a key input into the

valuation model.10

Sparkasse GW realises that it could potentially suffer a loss on the underlying credit exposure that is not fully

compensated by the receipt under the credit default swap. This could arise because a spread widening is not a credit

event as defined in the CDS documentation. The savings bank can reduce this risk by buying a European11 style credit

spread put. Sparkasse GW will pay the seller of the option a premium of EUR 0.1 million. The seller of the put (Nord

LB) will pay Sparkasse GW EUR 10 million if the spread of the Volkswagen bond surpasses 70 basis points over

LIBOR.12

Example 2 - Risk reduction through credit spread option

2.1.2 Diversification Due to its narrow alignment the savings bank GW lacks customers whose risks are unlinked to the German automotive

sector. In order to better spread the risk, the savings bank sells a credit default swap on Microsoft because there are no

Microsoft bonds denominated in EUR. I. e., the credit default swap is designed to create required risk/return profiles

which are not readily available in the cash market. Failure by Microsoft to pay will make the savings bank pay EUR

100 million. For taking on that risk Sparkasse GW receives a premium of EUR 0.1 million.

Example 3 - Diversification through credit default swaps

7 These contracts are known as ‘digital’ or ‘binary’ contracts. Usually, the cash settlement amount is calculated as the

reference value less the „final value“ of the reference obligation after the credit event. 8 Heidorn (1999), p. 10 9 PricewaterhouseCoopers (2002), p. 39 10 PricewaterhouseCoopers (2002), p. 45 11 Right but not obligation to sell the specified credit risk at the strike price at option‘s expiry; in contrast American:

until option‘s expiry 12 Binary Option - seller pays a fixed amount if and when default occurs, else no payments


2.1.3 Risk design Via total return swaps it is possible to synthetically construct loans which fit exactly the risk profile of the savings bank.

In order to complete the credit portfolio the savings bank GW is looking for exposure to Argentinia in Swiss franks.

This will result in diversification effects both in credit and market risk. Therefore the Sparkasse GW enters into a 5-year

total return swap referenced to a synthetic Argentina bond in Swiss franks. Sparkasse GW receives a hypothetical

coupon (6%) and an amount in Swiss franks, if any, equivalent to the appreciation in the market value of the bond. If

the value depreciates, a payment in Swiss franks would be paid by Sparkasse GW to Nord LB, together with a regular

floating rate payment in EUR, based on Libor plus 150.

Example 4 - Usage of a total return swap

2.1.4 Optimisation of the portfolio return

A credit-linked note is an instrument under which one party (“the issuer”) issues a note to another

party (“the investor”) in return for consideration equal to the principal value (assuming note is

issued at par) of the note. The coupon on the note is linked both to the credit quality of the issuer

and an obligation (“the reference obligation”) of a third party (“the reference entity”).

In order to optimise the portofio return of the banking book, Sparkasse GW is looking for 1-year high-interest EUR

investment possibility in Polish sovereign bonds, which currently have a 0% regulatory risk weight. However, the cash

market offers only a suitable Polish sovereign bond (P) that matures in two years. The purchase of this bond is out of

question for Sparkasse GW as it fears realising losses when reselling the bond after one year. In addition, an investment

for a period longer than one year at this credit risk violates the investment regulations of the savings bank. A change of

the regulatory capital weight due to the New Basel Capital Accord could additionally have negative implications. The

Structured Finance Department of Nord LB sells to the savings bank a 1-year credit-linked note with the following

attributes:

issuer: Nord LB, maturity: 1 year, reference obligation: Polish sovereign bond P, interest rate: 8 %,

payment: 100 or residual value of the Polish sovereign bond P in case of a credit event

The credit-linked note allows the savings bank to take exposure to Poland for a tailored period while the Nord LB

purchases a one-year protection on Poland.

Example 5 - Credit-linked note13

2.1.5 Hedge of a forecast transaction Until this day Sparkasse Gifhorn-Wolfsburg does not show certified liabilities in its balance sheet.

When the savings bank decides it will be issuing IHS, or Inhaberschuldverschreibungen (debt obligations), it may hedge

the risk of changes in Volkswagen’s credit status from the date it decided to issue the bonds to the date the bonds are

issued (one year). If VW’s credit status deteriorates, the bond will be issud either at a higher rate or with a higher

discount or smaller premium than was originally expected. Sparkasse GW enters into a one-year European Credit

Spread Put Option. As a protection buyer the savings bank pays a premium of 0.1% (i.e. 10 bps) of EUR 100 million.

The option will be exercised if the credit spread of the underlying Volkswagen reference bond moves above Libor+30.

The protection seller has to pay the savings bank the difference to the strike price over a five-year period (i.e. the

maturity of the IHS).

Example 6 - Anticipated fixed rate debt issuance

13 Based on Sengera (1999), p. 587


2.1.6 Funding arbitrage

Another motivation for a bank to enter a CDS contract as a protection seller is the so-called funding

arbitrage which is explained by another example.14

DZ Bank, rated A2 by Moody’s Investors Service, wants to take on the credit risk of DaimlerChrysler floating rate

medium-term notes due 02/25/2008 (BBB rating by Moody’s) trading at LIBOR + 30bps15. DZ Bank funds at LIBOR +

20bps and can therefore buy the BBB rated asset (directly) and earn a spread of 10bps. KfW banking group (rated

AAA) that funds at LIBOR – 30bps can purchase the DC notes and earn a spread of 60bps but may not want exposure

to a BBB asset. The direct purchase can be summarised as follows:

DZ Bank KfW banking group

Asset + 30bps + 30bps

Funding (+20bps) (-30bps)

net interest margin + 10bps + 60bps

risk exposure DaimlerChr. Floating rate note DaimlerChr. Floating rate note

In an alternative scenario instead of purchasing the DC notes, DZ Bank sells KfW protection on the BBB rated asset for

20bps (the premium). As a result, DZ Bank is assuming the same credit risk and earning 20bps instead of the net 10bps

it would have earned if the DC note had been bought outright. KfW has bought protection from DZ Bank for 20 bps and

can purchase the underlying BBB rated floating rate note to hedge the position for a net (funding) income of 60bps,

leaving KfW with a hedged position that is still returning 40bps but with exposure to DZ Bank. Another way to look at

the situation: The protection buyer, KfW, has effectively “rented” its balance sheet to the protection seller, DZ Bank.

The 40bps (being the net funding income of 60bps less the 20bps premium) will have to provide an adequate return to

compensate KfW for the counterparty risk assumed to DZ Bank. The ‘balance sheet rental’ can be summarised as

follows:

DZ Bank KfW banking group

asset - + 30bps

funding - (-30bps)

- + 60bps

credit default swap + 20bps - 20bps

net interest margin + 20bps + 40bps

risk exposure DaimlerChr. Floating rate note DZ Bank

Example 7 - Funding arbitrage

2.2 Asset-Backed-Securities

2.2.1 Motivation for ABS for the originator

There are several advantages for a bank to engage in a collateralised loan obligation. The most

important advantages are discussed in this section. Banks are required to hold risk-based capital of

8%16. The impact securitisation can have on regulatory capital is best illustrated by an example:

A German savings bank holds the following loan portfolios in its balance sheet:

1. EUR 30 billion residential mortgage loans

2. EUR 35 billion of diversified small enterprise loans without collateral

14 Based on PricewaterhouseCoopers (2001), p. 47 15 All quantitative data in this example is for illustrative purposes only. 16 See Deutsche Bundesbank 1997b


3. EUR 5 billion real estate project financing

4. EUR 2 billion auto loans

Liquidity of the savings bank is superb. The management of the savings bank would like to free economic as well as

regulatory capital by means of a securitisation transaction.

1. Which sort of transaction is most suitable for the savings bank taking into account the provisions of Basel I as

well as Basel II?

Regulatory capital weights of small enterprise non-collaterlised loans, project financing and auto loans under Basel I are

100% whereas the capital weight for residential mortgage loans is at maximum 70% (at a 100% Loan-to-Value).

Therefore, the residential mortgage loans do not qualify for securitisation. Under Basel II the risk weights of small

enterprise loans and auto loans are much smaller than the risk weight of real estate project financing, which are

subsumized under the so-called “Specialised Lending”. The economic risk of project financing is in contrast to the

small enterprise loans and the auto loans much higher due to increased single volumes and less diversification. In

conclusion, a CMBS transaction seems to be recommendable.

Due to the fact that a refinancing is not asked for/not required and because of a simple structuring a synthetic

transaction is recommended a tpyical transaction structure of which is shown in Figure 1.

Figure 1 Tpyical structure of a synthetic transaction

2. For a transaction volume of EUR 1 billion and a first lost position of 3% the regulatory capital charge under

Basel I before and after the transaction should be calculated for the situation where the savings bank retains the

first loss position and for the situation where it sells the first loss piece.

Before: EUR 1 billion x 100% x 8% = EUR 80 million

After (with first loss piece):

• Supersenior swap: 80%17 x 20%18 x 8% = 1.28%, i.e. EUR 12.8 million

• First losspiece: deduction from equity = 3%, i.e. EUR 30 million

17 Assuming this (typical) tranching 18 According to the supervisory commission, a bank achieves an equity capital relief of 80 % by purchasing a credit

default swap (CDS) with an OECD bank. If the CDS counterpart is a state-guaranteed bank like the “Kreditanstalt für Wiederaufbau” (KfW), the bank will even obtain 100% equity relief. Against this background and with the help of the two securitisation programmes PROMISE and PROVIDE, the KfW has become a very strong player in the German securitisation market. Via credit default swaps banks are transferring their credit risks to the KfW which is then transferring these entirely to a Special Purpose Vehicle (SPV) issuing Mortgage Backed Securities. The KfW is subsequently not keeping any risks on the balance sheet - the only advantage being the 100 % equity relief for the bank. Since nearly all transactions are being handled via these programmes, they can be considered as the de facto standard for synthetic securitisation transactions. See 4.5.7 and Keller (2002) chapter 3.5.2 p. 136-143 and chapter 3.6.2 p. 149-151.


• Result: EUR 80 million – (EUR 12.8 million + EUR 30 million) = EUR 37.2 million regulatory capital saving

After (without first loss piece):

• Supersenior swap: 80% x 20% x 8% = 1.28%, i.e. EUR 12.8 million

• Result: EUR 80 million – EUR 12.8 million = EUR 67.2 million regulatory capital saving

Example 8 - Reducing Risk-Based Capital Requirements, based on Kohler (1998)

Securitisation helps to create scope for new lending. Closely linked to this benefit is the fact that

securitisation can be a tool to increase the capital ratio. By using the cash proceeds, generated by

securitising assets, to shrink the balance sheet by redeeming debt instead of originating new loans,

the capital ratio can be improved.19

2.2.2 Motivation for ABS for the investor20

Investors buy ABS for a variety of reasons:

1. Attractive yields. Among triple-A rated assets, ABS offer higher yields than comparable-

maturity government securities and yields that are similar to corporate bonds and mortgage-

backed securities (MBS) of comparable maturity and credit quality.

2. High credit quality. ABS are one of the most secure investment vehicles from a credit

standpoint. Like other debt instruments, they are evaluated and assigned a rating based on

their ability to pay interest and principal as scheduled. But unlike most corporate bonds,

ABS are secured by collateral and creditenhanced with internal structural features and/or

external protections to further ensure that obligations are met. Most ABS receive the highest

rating— triple-A—from the major credit rating agencies.

3. Diversity and Investment Diversification. The ABS market is highly diverse in terms of

structures, yields, maturities and collateral. The assets that back securities represent many

sectors of business activity, from credit card receivables to auto, boat and recreational

vehicle loans, and from equipment leases to home-equity and bank loans. In addition, the

ABS sector offers investors the ability to diversify their fixedincome portfolios away from

more traditional concentrations in government, money market and corporate debt securities.

4. Predictable cash flow. The certainty and predictability of cash flow for many types and

classes of ABS are well established. Investors can buy these securities with considerable

confidence that the timing of payments will occur as expected. (However, for some of the

more recent mortgagelike ABS that are subject to greater prepayment uncertainty, investors

should understand that the predictability of cash flow is less precise. This higher degree of

uncertainty is normally reflected in a higher yield.)

19 The figure is based on Glüder/Böhm (2003), p. 649 20 The market consists mainly of banks, insurance companies (subject to § 54a Versicherungsaufsichtsgesetz),

investment companies (subject to §8 Gesetz über Kapitalanlagegesellschaften), social security (subject to Sozialgesetzbuch) and charitable trusts (subject to state laws). Bartelt (1999) p. 87 and 293/294).


2.3 Loan Sales

Sections 2.1 and 2.2 described more complex methods for transferring of or investing in credit risk.

The simplest way of transferring the credit risk of a loan, however, is to simply sell the loan to a

third party. In connection with subsequent securitisation this transaction is known as true sale. But

the transferee does not necessarily have to be special purpose vehicle that uses the proceeds to issue

asset-backed securities. Especially in the case of non-performing loans the financial assets are

mostly not purchased by special purpose entities.21 Selling NPLs may be an emergency exit for the

German banks. The German distressed debt market is opening up and the opportunity to sell non-

performing loans could remove a huge burden from the banks (see 3.3). Credit Suisse First Boston

wrote in their equity research dated 9 August 2004, on their ratings update of HypoVereinsbank:

‘We estimate that HVB is saddled with EUR26bn of NPLs - the cost of carrying those assets, the

need to continually shore up coverage ratios and the costs of retaining hundreds of employees to

manage their workouts is punishing profitability. Shedding NPLs will not only improve profitability,

but also release a substantial amount of dead capital. We believe that the demand for distressed

debt in Germany is higher than ever…’

3 Market participants

3.1 Credit Derivatives

The growth of the global credit derivatives market has surpassed previous expectations. The British

Bankers' Association (BBA) conducts a detailed survey every two years of credit derivatives

activity. Their survey is based on responses by 25 major dealers, and covers the size, applications,

products, and constraints of credit derivatives activity. In their Credit Derivatives Report 2003/2004,

the BBA estimated that at the end of 2003 the global market (excluding asset swaps) accounted for

$3,548 billion or $3.5 trillion (see Figure 2): ‘This growth is expected to continue, with the global

credit derivatives market predicted to increase by nearly half again in 2004 to $5,021 billion and

reach $8,206 billion by 2006. If asset swaps are included in the market size estimates, it is thought

the global credit derivatives market will reach $8.4 trillion by the end of 2006.’22 More recent data

proves how ‘way off’ the BBA were back then.

21 „The receivables to be sold should be selected randomly within the scope of the contractual eligibility criteria“,

BaFin (1997). According to Grumbach (2005), p. 12, the first asset-backed securitisation of distressed debt is yet to come. “Es ist nicht unser Ansatz eine „Bad Bank“ zu schaffen, bei der schlechte Risiken konzentriert oder zu der Kunden ausgelagert werden, die ihre Kredite nicht mehr bedienen können.“, press release by the Sparkassen-Verband Baden-Württemberg, August 19, 2005

22 BBA, Credit Derivatives Report 2003/2004, p. 1


Figure 2 - Global credit derivatives market (excluding asset swaps in $bns), based on BBA 2003/2004 survey

The last detailed survey that the International Swaps and Derivatives Association, Inc., (ISDA)

conducted was for the last six months of 1997. Beginning in June 1998, ISDA has been publishing a

Flash Survey every six months which gives an indication of the overall trend in outstanding interest

rate swap, currency swap and interest rate option transactions. According to ISDA’s 2005 year-end

market survey, credit default swaps grew 38 percent from $12.4 trillion to $17.1 trillion, compared

with 48 percent growth during the first half of 2005. Growth during all of 2005 was 105 percent,

compared with 123 percent during 2004. In all, 86 firms provided CDS data (see Figure 3).

Credit default swaps markets, global volume

$0

$2.000

$4.000

$6.000

$8.000

$10.000

$12.000

$14.000

$16.000

$18.000

1H01 2H01 1H02 2H02 1H03 2H03 1H04 2H04 1H05 2H05

US

$ b

n

Figure 3 - Evolution of CDS market 2001 through 2005 (ISDA)

The Bank for International Settlements (BIS) regular surveys of OTC derivative transactions in

June 1998. The BIS conducts two surveys, a semiannual survey and a more detailed triennial survey.

The semiannual survey reports notional amounts outstanding and gross market values outstanding

of the OTC interest rate and currency derivatives exposure of major banks and dealers in the G10

countries. In addition to outstandings and gross market values, the Triennial Central Bank Survey

of Foreign Exchange and Derivatives Market Activity reports derivatives turnover along with some


information on currency breakdown, counterparty type, and maturity. According to BIS (2006)

notional amounts outstanding of credit default swaps (CDSs) rose by one third during the second

half of 2005 to $13,697,5 billion (see Table 1), after a 60% increase in the previous six months.23

Gross market values of CDSs went up by 31%. Growth was particularly strong in single-name

contracts, whose notional amounts increased by 40% to $10,217.5 billion.

Table 1 - CDS market, nominal or notional principal amounts outstanding at end-December 200524

The market for CDSs is largely an interbank market. Trades between reporting dealers account for

almost two thirds of the total notional amount outstanding, and other financial institutions make up

much of the remainder. Non-financial customers were counterparties in only 3% of all trades. The

data do not confirm fears that the emergence of a liquid credit derivatives market has led to a large-

scale transfer of risks from the banking to the insurance sector. Insurance corporations accounted

for $180 billion (2%) of the protection bought, and purchased $60 billion (less than 1%) of the

protection sold by the reporting dealers. While it is possible that these aggregates hide some

sizeable individual exposures, they certainly do not support a picture in which insurance companies

purchase CDSs to take on credit risk on a massive scale. That said, it must be pointed out that the

BIS data do not contain information on instruments other than CDSs (including synthetic CDOs)

23 The total notional amount outstanding is calculated as the sum of contracts bought and sold minus half of the sum of

contracts bought and sold between reporting dealers. I.e., (10,281+9,749)-[0,5*(6,372+6,293)] 24 BIS (May 2006), p.10. ISDA and BIS figures deviate from each other for reasons of coverage. Approximately 60

leading banks domiciled in the G-10 countries report these statistics (on a group basis, ie including branches and subsidiaries); these institutions account for a share of more than three-quarters of the global OTC derivatives market. Seven German banks actively involved in the derivatives business participate in the survey. The ISDA surveys on the other hand cover 86 companies.


that could be used to transfer credit risk across sectors. The Balance of Payments Statistics by the

Deutsche Bundesbank provides further information on the German participation.

A survey conducted by the Bundesbank in the second half of 2003 of the ten German banks most

active in the market for credit derivatives indicates that these institutions acted as risk shedders in

the CDS market for approximately 3,270 billion (of which 3,220 billion in single-name CDS) and

as risk taker for approximately 3,235 billion (of which 3,210 billion in single-name CDS).25

Total

with

reporting

banks

with other

banks and

financial

institutions

with non-

financial

corporations

contracts reported by 60 reporting banks world-wide

2H 2004 4695 2020 2291 384 98

1H 2005 8444 4013 4040 391 156

2H 2005 11612 5368 5706 538 206

of which: contracts reported by German banks

2H 2004 880 305 532 43 25

1H 2005 1631 524 1081 26 34

2H 2005 2262 745 1470 47 42

Market valuesNominal values

Table 2 - Balance of payments statistics, Deutsche Bundesbank (June 2006), p. 84, 85 (in EUR million)

3.2 Asset-backed securities

The first securitisation transaction in Germany was concluded in 1995. However, a true

securitisation market has evolved in Germany only from the year 2000 onwards. After a slowdown

in 2003 and 2004, the German securitisation market picked up again in 2005 attaining a volume of

securitised loans of EUR 35 billion. This increase is due to a substantially higher number of

transactions (26 against 18 in 2004) but also to a rise in the average transaction volume to EUR 1.3

billion.26

The share of securitised German assets in the European securitisation market decreased by 159% in

2005 as compared with 2004 and accounted for approx. 10%. In 2005 important asset classes in

Germany were (1) asset-backed securities (ABS) in a narrower sense (these are in particular

securitised pension claims, leasing receivables and car loan receivables), (2) Residential mortgage

backed securities (RMBS), (3) Commercial mortgage backed securities (CMBS) and (4)

Collateralized debt obligations (CDO), which also include securitised portfolios of SME loans.

While the RMBS, the strongest asset class in the past, continued to lose importance, the number of

ABS and CMBS transactions has increased.

25 See Deutsche Bundesbank, Credit risk transfer instruments: their use by German banks and aspects of financial

stability, Monthly Report, April 2004, pp 27-44. 26 Moody’s (2006). Moody’s publishes each year a report focused on the German/Swiss/Austrian market called „200X

Review and 200X+1 Outlook“. The most recent version, i.e. published 2006, is for subscribers only. However, the German translation is free. This special report is a comprehensive source covering the market in terms of e.g. volume, number of transactions and asset classes.


In addition, new asset classes are gaining increasing

importance. The securitisation of quasi-equity

financings for SMEs, such as participation rights

(Genussrechte) is to be mentioned in this context. Up

to now financings of participation rights worth a total

of EUR 1.4 billion have been securitised in the market

via six transactions. With four transactions arranged

under the name "PREPS" the Capital Efficiency

Group (DEG/HVB) has been particularly active in

this field. Further transactions in this segment are

currently in the structuring phase.

In contrast to other securitisation markets, the German

market is overall still dominated by synthetic

securitisation transactions. In a synthetic transaction

the risks of loans are transferred to the capital market

while the loans themselves remain on the balance

sheets of the banks. However, following first adjustments in the legal and tax framework (among

others, the transfer of securities was facilitated through the introduction of a refinancing register)27

so-called true sale transaction, which means the sale of loans in the capital market, are also being

used on a larger scale. In 2004 the number of new true sale transactions for the first time exceeded

the number of new synthetic transactions. The importance which these two securitisation

instruments will have in the future decisively depends on whether the banks will succeed in selling

a significant part of their economic risks, i.e. parts of the first loss pieces, in the capital market and

on how the funding possibilities of the German banks will develop.

The development of the German securitisation market has been strongly marked by the support

from public institutions such as KfW and the EIF. This was especially the case for asset classes that

were difficult to place in the capital market owing to their high heterogeneity and low level of

standardisation (e.g. loans to SMEs). Moreover, under the lead of KfW the True Sale Initiative was

founded by several German banks in 2003. The before-mentioned changes in the legal and tax

framework are the result of the efforts undertaken by these banks to facilitate true sale

securitisations.

In June 2004 the True Sale Initiative led to the foundation of True Sale International GmbH. The

"RCL Securitisation" transaction of Dresdner Bank, which will be launched in the market in spring

2006, will be the third true sale transaction launched with a German SPV, and with the label

"Certified by True Sale International". The total volume of true sale securitisations will then amount

to more than EUR 5 billion. Information on "True Sale International GmbH” see 4.5.7.

27 See ‚Auch Bundesrat für Einrichtung eines Refinanzierungsregisters’ [Online]. (July 11, 2005)

Figure 4 - Percentage by domicile of assets YTD 2006, source: HVB Global Markets


3.3 Non-performing loans

Starting in 2003, Germany’s large market for the purchase and sale of portfolios of non-performing

loans (NPLs) has become the focus of US investors and specialist private equity firms. Today,

Germany is believed to be Europe’s largest distressed debt market by far with an estimated

EUR200bn – EUR300bn of bad loans28 . While there is still a large gap between the amount

investors are willing to pay for a NPL portfolio and the value ascribed by the originating German

bank to such portfolio in its asset books, by now, most of the banks have made provisions for the

sale of their NPL portfolios and starting in 2003 there is significant and increasing activity by a

variety of international investment banks and specialist private equity firms. In the summer of 2003,

US private equity fund Lone Star helped to establish the market in Germany with the purchase of

EUR225m of bad loans from the insolvent Gontard & MetallBank AG (G&M), a defunct regional

lender. In November 2003, Goldman Sachs acquired all of BW Bank’s non-performing loans to

real estate company WCM. The same month, Munich-based Hypo Real Estate AG (HRE)

completed a EUR419m sale of a NPL portfolio to a joint venture between J.P. Morgan Chase and

Lone Star. In 2004, NPL portfolios with a face value of at least EUR6.5bn and single loans with a

face value of EUR4bn changed hands. In addition, there were more than EUR10bn of property

deals, including the sale in September 2004 of a EUR3.6bn portfolio by HRE to Lone Star. In

October 2004, the institutional restructuring unit (IRU) of Dresdner Bank announced the sale of

EUR1.2bn of bad debts. The market, so far, is dominated by US investors like Morgan Stanley,

Goldman Sachs and specialist private equity firms like Fortress, Cerberus and, in particular, Lone

Star.29

4 Sources of information The focus of this chapter is to address difficulties in obtaining information that is used for pricing

purposes. The objective is to answer very practical questions like “What information is readily

available from rating agencies for different asset classes, what kind of deal information is free, for

what do you have to pay? Which platforms exist, what information is available?“ As the credit risk

transfer market intensifies, financial institutions face a growing need for accurate and timely pricing

data that can be used for valuations as well as regulatory, accounting, and risk management

requirements. Table 3 gives an overview of the situations in which prices are necessary both from a

regulatory and from an economic point of view.

ABS credit derivatives

valuation (point in time)

regulatory (supervision, accounting, MaRisk)

price calculation is not uniformly regulated

30

price calculation is not uniformly regulated

28 Ernst & Young, Global Nonperforming Loan Report 2004 29 Grumbach (2005), p. 20-21 30 Mark-to-market is either not within the scope (Basel II), part of the notes or depending on categorisation (AfS etc.)

or not explicitly regulated (MaRisk)


economic (Bank management, Risk-Controlling etc.)

price calculation in the context of issuance using organization-specific models (Originator) price calculation for the investment decision using organizaiton-specific models (Investor)

price calculation for decision to buy protection using organization-specific models (protection buyer) price calculation for the decision to sell protection using organization-specific models (protection seller)

risk measurement (time period)

ex ante

regulatory

risk is being measured depending on the chosen approach using specified models on the basis of (among others) nominal values

risk is being measured depending on the chosen approach using specified models on the basis of (among others) nominal values

economic (CVaR, credit risk models)

dynamic measurement and management using orginization-specific models

dynamic measurement and management using orginization-specific models

ex post

regulatory

Reporting (determination of the loss potential in the form of periodic results)

Reporting (determination of the loss potential in the form of periodic results)

economic

validation of the models (backtesting), Validierung der Modelle (Backtesting), compliance with exposure limits

validation of the models (backtesting), Validierung der Modelle (Backtesting), compliance with exposure limits

Table 3 - Regulatory and economic requirements for prices31

The most appropriate source of fair value information is the current market price for an identical

instrument at the valuation date. This should be the most reliable source, especially where the

instrument is actively traded and quoted market prices are available (mark-to-market). For illiquid

assets or liabilities, it may be difficult to obtain prices either directly or indirectly from the market.

In these cases, internal valuation techniques may be used (mark-to-model). The inputs required by

valuation models vary from product to product. Certain inputs are readily available from the market

but others are much more difficult to ascertain and my have to be derived from another input using

various assumptions.

Problems associated with the pricing of asset-backed securities go in the same direction as for credit

derivatives. Assed backed securities are priced by measuring the present value of an expected series

of cash flows using a risk-adjusted discount rate. ABS differ however from the plain vanilla fixed-

income investment because they have significant cash flow uncertainty. This uncertainty is due to

nature of the collateral supporting the investment (e.g. 30-year residential loans that are subject to

unscheduled principal repayments). Market participants recognise this aspect and, therefore, use

various model to estimate the timing of the cash flows. Key factors affecting the pricing models of

ABS include:

• the quality of the underlying assets

• the quality of the loan servicer

• the asset’s prepayment risk related to embedded options to prepay the underlying

instruments

31 This table has been prepared on the basis of an interview with Dr. Michael Lesko, managing director of Gillardon.


• tranche attributes that prioritize cash flows such as credit support features or lock-out

provisions

• lock-out provisions that assign prepayments to specific tranches

• financial guarantees or insurance providing some level of protection for potential credit

losses

4.1 Rating Agencies

All three rating agencies have public websites as well as client sites. On the public website there is

usually a special section that is devoted to Structure Finance. Information that is available comprise:

news and analysis, credit ratings, analyst contact data, reports on rating criteria for different asset

classes, special reports on current developments, market and performance reports. On the sites for

paying clients there are more detailed information on ratings of individual transactions. It is also

possible to customize the website in order to get tailored information.

For a single transaction, Moody’s (see Figure 10) gives a deal summary that firstly includes all

reports (performance, pre-sale32 and rating action reports). Secondly, the investor receives issuer

details, analyst contact data and a listing of all tranches with their respective ratings and last

changes. For individual tranches it is possible to receive a debt description (see Figure 11) that

includes the most important data. More detailed information on this credit is only possible as a

registered user. Fitch Ratings offers an overview of each transaction by listing all notes classes with

their respective rating, total amount, coupon rate and the responsible analysts (see Figure 12). More

detailed information on individual transactions is only possible as a registered user of Fitch

Research. Standard & Poor’s provides the investor with a listing of all classes including their rating

(see Figure 13). For a specific class it is furthermore possible to receive key data and analyst contact

information (see Figure 14). As with the other agencies, the registered client will receive more

detailed information.

All rating agencies are helpful sources not only with respect to asset-backed securities but also with

respect to credit derivatives. Fitch Ratings e.g. offers Valuspread, a CDS pricing service that

provides pricing data from credit derivatives market-makers. The user can compare yields and

valuation, even among illiquid and hard-to-value securities. Valuspread provides daily and

historical data for more than 2,500 reference entities (see Figure 15 and Figure 16).

4.2 Transaction-related sources of information

There are various types of information material on a securitisation structure available in order to be

able to make an investment decision. An information memorandum or offering circular will be

published at the date of issuance together with new issue or pre sale reports drafted by rating

agencies. Over the life time of the transaction there will be information by the originator through

so-called investor reports. This chapter will shortly describe these pieces of information.

32 See 4.2


4.2.1 Information Memorandum

The information memorandum (IM) or also called the offering circular is basically the prospectus of

an ABS issuance. This document is drafted by the originator in cooperation with the agent.

Subsequently, the agent distributes the IM to the interested public. In that respect the information

memorandum is the most important source of information for the investor before making the

investment decision. This report portrays the structuring of the securitisation, the legal structure as

well as rights and obligations of all parties in a detailed way. Figure 5 demonstrates which points

are typically covered by the information memorandum.

Figure 5 - Table of Contents for Driver One 33

4.2.2 Rating agencies’ pre sale reports

Pre Sale reports are distributed to the investors before the issuance of ABS. As noted above, the

reports are usually available from the respective agencies. The pre sale report essentially is a

summary of the entire transaction from the view of the rating agency. By doing this, the rating

agency touches on the main elements and makes an overview using the most important figures. The

most important part of the pre sale report is a description of the used rating method and the

assumptions for the transaction under question. In this way the investor receives relevant

information on those variables, that influence the probability of default as well as the loss severity

of the reference portfolio.

33 Depending on structure and other elements of the transaction these points are more or less detailed and other aspects

may be added


4.2.3 Investor reports

Investor reports are the means by which the originators fulfill their obligation vis-á-vis the investors

to provide information over the lifetime of the transaction, i.e. the originator is obliged to update the

investors in regular time intervals on the performance of the transaction. This usually happens

quarterly, some originators make information available even monthly. The investor reports inform

on the development of the transaction. The reports provide e.g. reference claim information, credit

event profile, delinquency profile or distribution by first digit of postal code.

Unfortunately, there is not yet an established market standard for investor reports. The quality of the

investor reports is for that reason very differing. However, reporting on EU CMBS deals—

historically spotty, inconsistent, and limited in some cases by borrower-negotiated or government-

imposed restrictions on disclosure—has become more complete and consistent as a result of

industry-wide efforts to improve transparency. The European CMSA recently rolled out its model

investor reporting package with the stated goal of increasing the quality and detail of property, loan,

and deal reporting. Fitch publishes its Issuer Report Grade, scoring CMBS deals for the quality of

their data reporting. Several third party cash flow analysis providers, such as Trepp, have set up

shop in Europe.34 Fitch Ratings Ltd. started in autumn 2004 the so-called issuer report grades.35

When grading the issuer reports Fitch Ratings differentiates between two sections. The first part

grades the data quality of the reports by comparing data with the reporting requirements of the

transaction. The second part judges on non-data quality factors, like delivery method and

accessibility, timeliness and user convenience. For the total grading the data quality category is

double-weighted compared to the non-data quality category. The score ranges from one star (4 -) up

to five stars (1 +). Fitch sees room for improvement mostly with respect to the reporting on the

liabilitiy, counterparty data (e.g. the swap counterpart) and the availability and accessibility of the

reports. The introduction of issuer report grades are a further step towards the strengthening of the

European securitisation market. However, there remains the need for substantial discussion

concerning the way and content of investor reports because no uniform standards have been

established so far. This calls for a dialogue between originators and investors in order to satisfy the

information needs of investors on the one hand but to reasonably limit on the other hand the burden

on the side of the originator. In that respect the need for information of an investor, who invests in a

AAA-rated trance deviates considerably from that need of an investor, who invests in a BBB-rated

trance. E.g., one of the objectives of the Hanseatic Securitisation Forum is to develop and establish

guidelines for the German securitisation market (see 4.5.4).

34 See page 3 of http://www.dechert.com/library/Structured_Finance_Report_05-06.pdf 35 for an example see

http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=277592&sector_flag=5&marketsector=2&detail=1


4.3 Market data providers

Market data providers operate in a highly fragmented industry, where Bloomberg and Reuters are

the two most important players. Both services are helpful when attempting to find prices for credit

derivatives.

Market data providers like Reuters or Bloomberg can be used to obtain prices quoted from the

market that are based on bid, offer or mid-market prices. For example, by using MRKT it is

possible to locate contributors who have a Bloomberg page providing prices/rates and frequencies

of prices/rates for a specific market. MRKT initially displays a menu of current markets. Once you

select a category, a sub-menu of countries or a list of current market sectors appears, depending on

your selection. If you select a country from a submenu of countries, the corresponding list of market

sectors appears. After pressing Credit Default Swaps and selecting Germany it is possible to view

price contributors for Germany. The user can then click each contributor to see CDS products

bid/ask prices. Figure 17, Figure 18 and Figure 19 show prices for the automotive/transport,

telecom and utilities sector that were quoted by HVB. Reuters essentially offers the same services.

Figure 20 shows so-called RICs for contributor chains from CreditTrade (contributor ID CTCD). So

the user is able to show all CDS prices contributed by CreditTrade for instruments like European

Corporates.

4.4 Exchanges/brokers and other parties

In an economist article dated Nov 18th 2004 with the promising title ‘New fuel for an old engine’

the following outlook on the German credit risk trading environment was given: ‘There are other

initiatives to stimulate a secondary loan market. In Munich, Deutsche Kreditbörse, owned by a

consortium of banks, has teamed up with Standard & Poor's, a rating agency, to standardise

ratings and valuation of bank loans in preparation for resale. The Hamburg stock exchange is

considering adding a bank-loan segment to its other traded markets. And DebtX, which runs a

secondary loan market in Boston, has teamed up with Günther & Partner, an advisory firm in

Munich, to get the ball rolling in Europe.’ Almost two years later, the outlook did not materialise as

envisaged. Even before really starting operations, the Deutsche Kreditbörse merged with with a

commodity exchange in Hannover to form the Risk Management Exchange (RMX) and is now

essentially the sister segment of the RMX Commodities. The trading system for loan amounts is

currently under development for RMX Creparts (Credit Participations). 36 The Hamburg stock

exchange up to this day has not added a bank-loan segment to its other traded markets. Only, DebtX

does have a foothold in the German market and is described in this section of the paper. All in all,

however, loan trading in Germany remains a less standardised or organised activity between the

buyer and the seller.

36 http://www.wtb-hannover.de/content/index_en.shtml?t2&en


4.4.1 The Debt Exchange, Inc.

The Debt Exchange, Inc. (DebtX) is one of the US leading full-service loan sale advisors for

commercial, consumer and specialty finance debt. DebtX helps financial institutions increase

profitability and reduce risk by offering comprehensive loan sale advisory services that create

liquidity in an institution's loan portfolio. DebtX operates the largest online marketplace of buyers

and sellers of commercial debt and offers a variety of innovative information services, including

DXMarkSM, the first objective valuation of commercial real estate portfolios based on actual

secondary market loan sales. DebtX serves commercial banks, insurance companies, investment

banks, government agencies and other institutions seeking a competitive edge through active

portfolio management.

Leveraging its experience in the United States, DebtX began offering loan sale advisory services

internationally in 2002 with the goal of creating a liquid international secondary market for

commercial loans. Beginning with Germany in 2002, DebtX has expanded its coverage proactively

focusing on the UK in 2003 and Italy in 2004. In 2005, DebtX began offering its services

Worldwide. To date, amongst other countries, DebtX has executed engagements in Canada,

Germany, Italy, the United Kingdom, India, Mexico, and Indonesia. The company has an office in

Frankfurt, Germany. The website http://www.debtx.com/default.asp is available in German.

DebtX Securities, Inc. is a member of the National Association of Securities Dealers (NASD) and a

wholly owned subsidiary of The Debt Exchange, Inc. Their broker-dealer license expands DebtX’s

scope of services by allowing us to structure and market securities, such as interest-only strips and

mezzanine loans, activities non-registered loan sale advisors are prohibited from practicing. Access

has not been granted to the author on the basis of academic purposes and is only possible after proof

of a trading interest.

4.4.2 Internet credit trading portals

Internet credit trading portals facilitate the trading of credit derivatives and loans. The most

prominent market players are Creditex and CreditTrade who end of July 2006 announced to merge37.

Creditex is the global market leader and innovator in execution and processing of credit derivatives.

The first and leading e-trading platform in credit derivatives, Creditex is used by more than 1000

credit derivatives traders at the world's top financial institutions. The platform has electronically

executed just under $1 trillion notional in credit default swap (CDS) indices, single-name CDS and

standardized structured credit products. In 2005, Creditex pioneered the first Tradeable Credit

Fixings, a milestone in bringing additional confidence and transparency to the market by providing

a standard benchmark and settlement rate. The firm is also leading the industry in "straight-through

processing" initiatives, allowing its growing client base to reduce operational risk and transaction

costs. Having received numerous accolades in leading financial media including Credit, Euromoney,

37 http://uk.biz.yahoo.com/25072006/325/creditex-credittrade-agree-merge.html


Forbes, Institutional Investor, Risk and, most recently, winning the IFR Innovation of the Year

Award for pioneering the Credit Event Fixings, Creditex's technology continues to set the standard

for innovation in the credit derivatives market and its talented people the benchmark for best-in-

class client service. 38 CreditTrade is a leading voice broker in the global credit markets,

specialising in credit default swaps, indices and structured products. From offices in London,

Singapore and New Jersey, CreditTrade provides leading transaction, data and trading platform

services to financial institutions around the world. CreditTrade continues to innovate with a number

of new services including financial and corporate bond electronic trading.39 CreditTrade currently

provides two different data packages for single name CDS - CreditTrade Market Prices and

CreditTrade Benchmarks. Both services provide independent pricing received by their brokers

from all of the major CDS market makers globally. The key difference between the two services is

that Market Prices provide you with intra day quotes and trades whereas Benchmarks are closing

prices for the most liquid names in the market.

4.4.3 Specialist pricing services

Institutions often use specialist pricing services alongside external pricing sources such as brokers

and counterparties. Markit Group Limited40 is the leading provider of independent pricing,

reference data, portfolio valuations and OTC derivatives trade processing to the global financial and

commodities markets. The company receives daily data contributions from 60 dealing firms, and its

services are used by 450 institutions. Markit's services are used to enhance trading operations,

reduce risk and manage compliance. Markit's position in the derivatives markets has been

acknowledged by the industry with awards from Credit for Best Operational Support Services

Provider 2006; Inside Market Data for Reference Data Provider of the Year 2006, and Company to

Watch 2006; Risk Magazine for Trading Initiative of the Year 2006 (Credit Event Fixings);

Structured Finance International's Editor's Award for Advancing Structured Finance 2006;

International Securitisation Report's Editor's Award for Innovation 2005; International Financing

Review's Innovation of the Year 2005 (Credit Event Fixings); Financial News' Best Derivatives

Data Provider 2005; and Institutional Investor's Operations Management Award for Vendor of the

Year 2005. Markit provides both composite and contributor pricing data on European ABS

securities, including RMBS, CMBS, ABS, and cash CDO’s issued in the European markets. Markit

offers the only multi-dealer platform for European ABS valuations, with approximately twenty

dealers in Europe committed to providing pricing on a daily basis. Markit European ABS offers

both bid and offer spreads and prices, as well as the weighted average life assumption used by the

dealers. Markit performs rigorous data cleaning routines on all data points submitted to remove

outliers, ensuring the highest quality source of pricing available. Buy-side subscribers have access

38 see www.creditex.com 39 see www.credittrade.com 40 www.markit.com


to the Markit platform, where they can view composite pricing as well as the individual

contributions that underlie them. They also have the ability to request private pricing from dealers

who are part of the platform, allowing them to consolidate their entire mark-to-market process over

a single platform.

4.5 Securitisation Platforms

4.5.1 Hypoport AG

Hypoport AG is cooperating with nearly all housing industry associations in order to establish an

alternative financing vehicle for housing companies. Via a special purpose vehicle obligations from

housing companies are purchased, bridge financed and after closure of the loans and portfolio set-

up they are placed as Mortgage Backed Securities on the capital market. Due to the traditionally

low credit risk of the German housing industry, the major advantage is the establishment of a

specialised asset class with low capital market spreads instead of mixing the housing companies’

obligations with poorly rated assets.

One of Hypoport’s core activities is to support the transaction processing with the help of an

integrated software technology which allows the collection of relevant market information from the

originator and to calculate fair capital market prices. The technology is integrated into existing

portfolio-reporting and -rating tools as well as in a multilanguage originator software for residential

mortgages.

The screenshots (see Figure 21, Figure 22, Figure 23) were taken from the Europace portal41

website in order to demonstrate the information available to investors. A free trial login was kindly

provided by Mr. Martin Damaske. The deal library is structured by region (i.e. country) and product

type, i.e. MBS, ABS and CDO. MBS is subdivided into RMBS and CMBS (currently no deals

available). For example for Germany there are currently 22 RMBS deals and 9 CLO deals stored in

the deal library. Out of the list of available transactions it is then possible to view a single deal in

three dimensions: summary, reporting and contact.

4.5.2 TXS financial products GmbH

TXS financial products GmbH was founded in 2004 in Hamburg and the company claims to be the

market leader42 for securitisation software and service. TXS financial products GmbH is a joint

company formed by agens GmbH & Co. KGaA (74%) and Deutsche Genossenschafts- und

Hypothekenbank (26%). The company offers "TXSUITE™"43, which is positioned in the market as

a transaction platform for the integrated IT solution for the entire securitisation process for

different asset classes (e.g. RMBS, CMBS). The transaction platform can be adapted to the specific

needs of the originator in three dimensions: transaction type, company objectives, and asset classes.

41 www.europac-cm.com 42 Presently, almost 50 customers from all banking sectors-of which 25 are multi-seller originators-manage more than

350 billion EUR securitised assets. 43 Software package for universal and integrated transaction engineering


A major advantage of the platform is the fact that several different securitisation transactions with

different asset classes can be simulated in parallel in just one software solution. This enables the

institution doing the securitisation to determine, plan, and complete the ideal transaction for

achieving the present objective. It does not matter whether it concerns a true sale transaction or a

synthetic securitisation. The transaction platform consists of three so-called Business Content

Modules which cover different asset classes.

1. TXSRMBS44 comprises the specific processes, functionalities, financial ratios, and

evaluation models for the execution of transactions, based on the asset class „Residential

Mortgages“ (Private Wohnungsbauforderungen). This allows for the conception and

implementation of transactions like portfolio sales/purchases, securitisation (e.g. PROVIDE

transactions, mortgage covered bonds or true sale RMBS) as well as warehouse transactions

(e.g. collateralised mortgage obligations, CMOs).

2. TXSCMBS comprises the specific processes, functionalities, financial ratios, and

evaluation models for the execution of transactions, based on the asset class „Commercial

Mortgages“ (Gewerbliche Immobilienkredite). This allows for the conception and

implementation of transactions like syndications, portfolio sales/purchases, securitisation

(e.g. PROSCORE transactions, single or multi-property transactions) as well as warehouse

transactions (e.g. collateralised mortgage obligations, CMOs).

3. TXSSME comprises the specific processes, functionalities, financial ratios, and evaluation

models for the execution of transactions, based on the asset class „ Corporate

Loans“ (Unternehmenskredite). This allows for the conception and implementation of

transactions like syndications, portfolio sales/purchases, securitisation (e.g. PROMISE

transactions, single or multi-borrower transactions) as well as warehouse transactions (e.g.

collateralised loan obligations, CLOs).

In addition to the transaction platform, TXS offers consulting services as a so-called master servicer

monitoring the transaction processes and especially controlling the ongoing compliance with the

rules relating to the processing of loans and transfer of cash flows. The master servicer often also

assumes responsibilities within the scope of the transaction reporting. A typical task of the master

servicer also includes the possibly necessary selection and coordination of a special servicer

(defaulted loans) and/or back-up servicer (replacement of the original servicer).

4.5.3 KfW's Securitisation Programmes

Traditionally, KfW promotes – among other target groups - small and medium-sized enterprises as

well as private residential mortgage loans by granting them through private as well as savings banks.

Considering the structural change in the banking sector where the lending business of private as

well as savings banks should remain attractive and the volume of loans offered to small and

44 Users of as of 03/2005: DG HYP, more than 20 regional banks, Bausparkasse Schwäbisch Hall, IT-Provider

(Kreditwerk, Fiducia IT AG, GAD/GRZ).


medium-sized enterprises as well as private residential loans should reach a sustainable required

amount, KfW is focusing on the growing importance of the existence of liquid secondary markets

for loans and loan risks45. For a long time, risks related to small and medium-sized enterprises were

considered not conform to capital market requirements as there were no or only minimal standards

of lending, portfolios were heterogeneous and there was insufficient public information about small

and medium-sized enterprises. Similar problems are to be considered with regard to second lien

residential loans.

Since the end of 2000 credit institutions can transfer risk related to SME loans via the programme

PROMISE to the capital market. For the purpose of securitising private residential

Figure 6 - Structure of Promise and Provide transactions taken from KfW (2006)

loans, in October 2001 KfW also established its platform PROVIDE (both are synthetic

securitisations).

As can be seen from Figure 6, the KfW synthetically takes on the credit risk via a credit default

swap. Subsequently, the credit risk is placed in the ABS- (credit –linked certificates of indebtedness)

and swap market (Senior CDS). The loans, however, remain in the bank’s balance sheet. In terms of

issue policy: a special purpose vehicle (SPV) is interposed between KfW and the capital market to

issue the CLNs. KfW acts as competitively neutral intermediary and provides access for large and

small banks via a standardized infrastructure. The standardization is achieved through the

following characteristics that are common to all transactions: synthetic with funded mezzanine

tranche, uniform collateral, uniform call features, uniform loss allocation principles, similar credit

event definition and SPV in Germany.

The standardization effectively results in lower transaction costs due to

• Less time consuming analysis for lawyers and investors and rating agencies

• Lower transactions costs also for originators, arrangers and super senior swap providers

• Not issuance volume: critical mass and broadening investor basis.

45 For social and economic benefits of securitisations see European Securitisation Forum (1999), p.6


The standardization furthermore is reflected in a much shorter time frame than for “normal”

securitisation transactions.

Figure 7 - Time - Frame of a Transaction via the PROMISE/PROVIDE Platforms of KfW

On their website, the KfW46 provides the following information on the PROMISE platform readily

accessible for everyone:

• Details on the structural characteristics of all PROMISE transactions

• The performance of all transactions closed via PROMISE is shown in the form of time

charts

• Information on specific PROMISE Transactions, i.e. Info Memo (sometimes called

prospectus), Fitch PreSale Report, Moody's PreSale Report and the Investor Report

On their website, the KfW47 provides the following information on the PROVIDE platform readily

accessible for everyone:

• details about the features of transactions already signed and hedged via PROVIDE and

about the underlying portfolios

• The performance of transactions concluded on and hedged via the PROVIDE platform

• Information on specific Provide transactions, i.e. info memo/prospectus, pre sale and/or new

issue reports by rating agency(ies) and investor reports

KfW participated in the conclusion of additional securitisation transactions with special features

that constituted a variation of the two securitisation programmes PROMISE and PROVIDE. These

are: Process Home 2003, Symvonie 2004-1, SEAS 2005-1, Proscore-VR 2005-1 and Stichting

Profile Securitisation.

The information provided is essentially the same as for PROMISE and PROVIDE transactions, i.e.

information on structural data, the performance of these transactions over time as well as

information on individual transactions.

46http://www.kfw.de/EN_Home/Loan_Securitisation/KfWs_Securitisation_Platforms/PROMISE/PROMISE_Transactio

ns/index.jsp 47 http://www.kfw.de/EN_Home/Loan_Securitisation/KfWs_Securitisation_Platforms/PROVIDE/index.jsp


4.5.4 Hanseatic Securitisation Forum

The Hanseatic Securitisation Forum (HSF) is an initiative of several different institutions, with the

aim of making the concepts of securitisation, Asset Backed Securities (ABS) and, especially,

Mortgage Backed Securities (MBS) accessible to a wider public. HSF plans a wide range of

activities to build up and deepen contact between companies interested in MBS. It will also

encourage and support information exchange and knowledge transfer bilaterally between individual

organisations.

Aside from clearly indicating its German base, the term Hanseatic designates a region that also

encompasses northern and north-eastern Europe, including the Baltic states and Poland - the entire

former Hanse area. The name also expresses the HSF objective of making ABS and particularly

MBS into recognisable tradable goods as well as establishing and optimizing the trading potential of

these assets according to Hanseatic values and tradition.

Through its activities HSF aims to make comprehensive, specialized information available to the

various participants and to provide a connection point for all interested institutions.

The section of the website called “deals” is only for users accessible. It is subdivided into RMBS

and CMBS and the following deals are currently being considered: Proscore-VR 2005, Bauhaus

Securities Ltd., Provide-VR-2002, Provide-VR-2003 and Provide-VR-2004. “Legal corner”

provides a comprehensive base of information on legal questions by two legal partners of HSF:

Norton Rose and Lovells, e.g. a Lovells internal note on the reorganisaiton of the German law on

covered bonds. Norton Rose’s international securities group (ISG) is a multi-disciplinary,

international team drawing on over 30 years’ experience and expertise in international securities

practice. The section “community” is essentially a web-forum, additional information and access to

deal analyses (Loan by Loan) as well as extensive transaction data. The section on information

material provides information with a focus on SMEs. It is possible for everyone to download

studies on SME financing by e.g. Euler Hermes or Ernst & Young. Registered users furthermore

have the possibility to download slide decks that were presented during workshops or other events

hosted by the HSF. It is envisaged to display reporting guidelines, but there is currently no

information on this topic. Last but not least this section offers HSF marketing material like the

company brochure. The section “news” shows research like reprints from RatingsDirect (S&P), e.g.

“True Sale of German Loans to SPE Valid Despite Court Ruling”. The section of the website called

“campus” provides exam questions and preparatory material. Mr Doswald, one of the initiators and

co-manager of the Hanseatic Securitisation Forum, is also lecturer at the University of Hamburg on

the subject of claim securitisation.

4.5.5 ABSNet

ABSNet is an English language imformation platform for asset-backed securities surveillance and

intelligence provided by a US company called Lewtan Technologies. The company is similar

positioned as Hypoport AG and is covering more and more European (including German)


transactions. They do have a better coverage than Hypoport, however, on individual deals ABSNet

covers not as deep as Europace does, although it claims to have the industry's deepest database with

current and historical performance statistics, tracking over 150 performance variables per deal,

including years of history, often inception to date, as well as deal notes, prospectuses, and servicer

reports. In any case, the software behind the information portal is not as powerful as with Europace.

For functionalities48 like comparisons up to the (not yet existing) “my portfolio” feature in Europace

ABSNet seems to be less good positioned.

The company markets is benefits as…

• The Industry's largest ABS performance database spanning over thousands of Issuers,

8,000+ deals, and 50,000+ bonds.

• Library of over 20,000+ servicer reports online.

• Information on the underlying collateral pool and credit support facilities.

• Pre-defined views at the deal (see Figure 24), class, and pool level. ABSNet™ Deal

Summaries provide a snapshot of deal information, while ABSNet™ Performance Data

views offer a more in-depth analysis of selected variables. You can define and save your

own views from ABSNet™'s extensive library of performance variables.

• All of the data associated with a deal can be graphed instantly for a quick visual analysis, or

exported to third-party applications such as Microsoft Excel.

Most prominent current content providers include Asset Securitization Report, Standard & Poor's ,

Moody's , Banc One Capital Markets, Reuters, Edgar, PR Newswire

4.5.6 Reporting Online GmbH

Reporting Online is purely a information platform for the purpose of publishing and accessing

investor reports. Aside from the specific investor reports no general information about

securitisations are available. Investor reports can only be accessed via a user ID. In general, all

holders of a given bond from a Deal that is reported on this site is entitled to access for that Deal.

Issuers, Trustees, Rating Agencies and, in some cases, Special Advisors are also usually entitled to

this information. However, in all cases, the specific Legal Documentation for the Deal in question

will determine who is ultimately eligible to receive Investor Reports. There are currently 37 CMBS

deals, 41 RMBS deals, 15 CDO deals and 6 other deals available, that can be selected through the

main menu (see Figure 26). If the user then clicks on the details of the selected transaction, the

following window appears (e.g. for the Europa One transaction, see Figure 27). Reports can only be

viewed after login. For the EuroHypo 2001-1 transaction Figure 28 shows which documents are

available after login.

48 ABSNet, however, does have all of these features: ABSNet™ Portfolios and ABSNet™ Deal Comparisons (only

accessible for registered users).


4.5.7 True Sale International (TSI)

True Sale International GmbH (TSI) was founded in Frankfurt in May 2004 by thirteen banks as

part of the True Sale Initiative. The objective was to build up an efficient true sale securitisation

market in Germany and to continually support its development.

Therefore, its activities comprise:

• influencing the fiscal and legal framework conditions,

• providing information that convinces economic policymakers of the advantages of true sale,

• building a common infrastructure/securitisation platform for the establishment of German

special-purpose vehicles (SPVs), and

• defining quality standards for liquid ABS issues and implementing these standards via a

certification procedure.

“Certified by True Sale International” is a label for transactions that are issued in accordance with

the assessment criteria defined by TSI GmbH. All assessment criteria were worked out in joint

working groups by the experts of the TSI shareholder banks. These standards are of a dynamic

nature since the members of the “Brand and Standardisation Forum" are striving continuously to

further develop the criteria to be fulfilled by true sale transactions. This also applies to the ongoing

reporting, which has to be standardised and be made available in a timely manner. The following

qualitative requirements must be met if a label is to be awarded:

• The TSI securitisation platform, i.e. the agreed German SPV solution, must be used.

• The recommended "Structure for the Information Memorandum (PDF)" must be used.

• A "Market-Making-Agreement (PDF English)", similar to the attached specimen, must exist

and the stock-exchange listing, which is, among others, the prerequisite for the eligibility of

the ABS securities as collateral with the ECB, must have been applied for.

• The transaction must comply with the "Standards for Investor Report", which were worked

out by TSI in cooperation with the experts from the banks.

• All investor reporting must be published in a timely manner on the website of TSI GmbH by

the respective originator.

• The certification is based on the acceptance of the "General Certification Requirements

(PDF)" including attachments.

All these Documents for Certifications can be downloaded from the website. Moreover, the website

shows in a detailed way best practices in investor reporting. The following transactions have been

carried out via the TSI platforms: Driver One GmbH (Volkswagen Bank securitizes car loans,

November 2004), Driver Two GmbH (Volkswagen Bank securitizes car loans, September 2005),

RCL Securitisation GmbH and TS Co.mit One GmbH (not yet issued). For these deals, apart from

the monthly investor reporting, there are available for download the Offering Circular (PDF), a new

issue report/presale reports.


5 Credit Risk Trading This chapter provides a more detailed discussion of credit risk trading and transfer within the

boundaries and outside of two ’banking groups’.

1. Public-sector banks — essentially savings banks (Sparkassen) and Landesbanken —

continue to dominate the German banking market and form Sparkassen-Finanzgruppe. At

the end of 2005, this association of banks comprised 463 savings banks, eleven

Landesbanken and Dekabank, and about 130 other financial service providers mainly in the

fields of life and non-life insurance, building societies, leasing & factoring, brokerage and

asset management, as well as real estate, and had about 380,000 employees.49 The sector

accounted for total assets of EUR2.3 trillion and equity of EUR92.3 billion at year-end of

2004. On an aggregate basis, these banks reported an operating profit of EUR9.6 billion and

a pretax profit of EUR5.1 billion for 2004.50

2. The credit cooperatives sector, the Finanzverbund, includes 1,345 local

Kreditgenossenschaften (KG), the two central banks, WGZ-Bank and DZ Bank, and the

various product providers, mortgage banks, insurance, leasing and a home loan bank.51 KGs

are cooperative credit associations in Germany whose primary aim is not to maximise profit

but to encourage their members economically.52 The 1,335 KGs in Germany have 14,554

branches, approximately 15.5 million members, total assets of more than EUR576 billion

and approximately EUR350 billion outstanding loans.

Within the context of this chapter I will define internal transactions as transactions where the

credit risk is not transferred outside the groupement, i.e. the capital market. Conversely, trading

across organisations comprises circumstances where the credit risk is not kept within the

boundaries of the groupement but is rather placed outside, i.e. the capital market.

5.1 Trading across organizations

DG HYP (part of Finanzverbund) has committed itself to facilitating the securitisation of credit

portfolio risks, and the corresponding placement on the capital market, on behalf of its partners.

Since October 2002, DG Hyp as the largest mortgage bank among three in the cooperative bank

association has been offering the smaller cooperative banks to bundle their portfolios via the DG

Hyp and to jointly place these on the market. The smaller cooperative banks do not have direct

access to the capital market because of their small portfolio volumes53. Back in 2000, DG Hyp

executed a deal to securitise parts of their own portfolio (via the Bauhaus Securities Ltd. conduit),

49 http://www.dsgv.de/en/sparkassen-finanzgruppe/daten_und_fakten/uebersicht/index.html 50 http://www.dsgv.de/download/files_en/markets_2004_en.pdf 51 http://www.bvr.coop/download/ConsolidatedAnnualAccountsBVR.pdf 52 See § 2 (1) of Satzung der Volksbank Solling eG, 37181 Hardegsen, p. 2 53 Bär (2000), chapter 4.3.3 p. 179, 180 on the ciritical mass test. Bund (2000), p. 132, states that taking into account

the average volume of annuity loans at German savings banks of 3.97% of the balance shee total and considering the recommended minimum size for a securitisation in a multi-seller progam as a rule-of-thumb, then the critical mass wil be around DM 2.5 billion.


leveraging the know-how gained in that process to execute multi-seller transactions during the

following years. Examples include the PROVIDE-VR 2002-1, PROVIDE-VR 2003-1, PROVIDE-

VR 2004-1, and PROSCORE-VR 2005-1 transactions.

Figure 8 - Simplified Proscore Transaction Structure

The structural aspects are – due to KfW’s standardization – the same for all above mentioned

transactions. DG HYP enters into a credit default swap under which KfW will pay any losses (in

cases of losses occurring in any KG’s subpool, after the respective threshold amount has been

reduced to zero) incurred on the reference portfolio. KfW in return hedges its exposure through a

credit default swap with an OECD bank and through the issuance of creditlinked certificates of

indebtedness (Schuldscheine) to PROSCORE-VR 2005-1 Plc, an Irish SPV.

The issuer transfers the risk arising from the Schuldscheine through the issuance of various classes

of credit-linked notes (“CLNs”) to capital market investors. The investors are secured by a pledge

over the Schuldscheine granted by the issuer to the trustee. DG HYP further enters as protection

seller into further credit default swaps with the KGs. The CLNs amortise sequentially, starting with

the Class A+ Notes, which rank pari passu and pro-rata to the Senior Credit Default Swap (“Sr.

CDS”). The losses, which include principal, interest and external foreclosure costs, will be allocated

in reverse sequential order. The KGs retain a threshold amount which covers the first losses

allocated to their respective sub-pool. After the threshold amount of any KG is reduced to zero, the

losses occurring in that particular sub-pool will be allocated to Class F of the CLNs. Losses

occurring in DG HYP’s subpool will be directly allocated to Class F.


5.2 Internal transactions

5.2.1 Sparkassen-Finanzgruppe

In 2004, BayernLB has for the first time positioned itself as risk clearing house for the Bavarian

savings banks. Through the “S-Bayern-Basket I” transaction the individual credit risks of the

savings banks are transferred to a special purpose entity through a credit default swap. The risks are

pooled there and finally sold back to the savings banks through the issue of a credit linked note.

BayernLB arranged a second credit basket transaction with a view to optimising credit portfolio

structures, whereby individual credit risks from 11 savings banks were transferred to a Special

Purpose Vehicle by means of a credit default swap, pooled there and then sold back to the savings

banks and BayernLB via the issuance of a credit-linked note. Secondary market transactions have

already taken place. A third basket transaction to be carried out at national level, involving further

expansion of the secondary market for trading in SME credit risks within the Sparkassen-

Finanzgruppe, is in the pipeline.

Figure 9 - Credit basket transactions structure

5.2.2 Finanzverbund

For many years, cooperative banks have been making use of traditional instruments such as loan

syndication, loan insurance, guarantees and sureties as ways of transferring their lending risks to

third parties. However, the spectrum of suitable products has been considerably extended in recent

years. Credit derivatives are playing an increasingly important role in this process. For example, DZ

BANK AG offers two risk transfer products known as "VR Circle" and "Standard Meta".

"VR Circle" gives local cooperative banks the opportunity to effectively enhance the diversification

of their credit portfolio through a carefully structured closed-loop transaction. Individual banks’

cluster risks are gathered into a risk pool, securitised and taken back by the participating banks in a

granular form on a volume-neutral basis. Risk is transferred synthetically through credit-linked


notes and so the relationship between the SME customer and the local cooperative bank remains

unaffected.

DZ BANK AG’s "Standard Meta" is an innovative corporate finance risk transfer product that is

available throughout Germany. Local cooperative banks can apply online to DZ BANK AG for

standardized deficiency guarantees on their SME exposures. With the VR-Bankenportal now

functioning as an access channel, subscriber banks can now review the status and progress of their

application on a continuous basis.

The WGZ-LOOP risk transfer platform marketed by WGZ-Bank eG is another good example of

the interaction between different partners in the Cooperative Financial Services Network in the risk

transfer context. WGZ-LOOP - the abbreviation LOOP meaning “LOan Optimizing Portfolio” -

also utilises a closed-loop model to optimise portfolio diversification through the transfer of risk on

unsecured commercial loans. This is a platform used for the transfer of credit risks with the help of

credit default swaps: In a first transaction, the credit volume of 16 member banks to an amount of

Euro 75 million is to be pooled. The idea is as follows: “In this way it is possible for member banks

to free themselves from cluster risks. Such risks arise, for instance, when a bank has granted large

volume loans to a company“.54 In contrast to the DG Hyp transactions described above, however,

the credits under the WGZ-LOOP scheme are not securitised and sold in the capital market. The

loans remain – comparable to other products that are not placed in the capital market – in the books

of the respective institutions. The accompanying default risks are transferred to another

participating bank by a kind of circulation model. In exchange, the transferring institution assumes

other risks from the credit pool. The prerequisite for this multi-seller transaction is that the uniform

BVR II rating must provide the basis for evaluating the contributed risks.

5.2.3 Conclusion

The objective of this section is to elaborate on some advantages and disadvantages linked to the

usage of credit pooling arrangements like VR Circle versus credit risk transfer into the capital

market like the multi-seller transactions. Advantages of one instrument are the disadvantages of the

other and vice versa.

When employing instruments like S-Bayern-Basket I, VR Circle or WGZ Loop I would argue that

the main drawback is that the default risk from the whole issue does not effectively leach out of

the realm of the participating institutions. For example, in transaction where 100 savings banks or

Kreditgenossenschaften write a credit default swap to the SPV, let’s say always one loan of EUR 1

million, then all 100 participating banks have to sell protection of EUR 1 million. From a cash flow

perspective, they first have to pay 10 bps premium to the SPV as a protection buyer, but in turn

receive 10 bps for their protection selling to the SPV, a complete zero sum game. The only

advantage is that if a loan of EUR 1 million of one participating bank defaults, the savings bank or

54 WGZ Bank Annual Report (2005), p. 19


Kreditgenossenschaft can ask the SPV to repay the amount but the SPV will be repaid by all 100

participating banks, i.e. each institution pays only EUR 10,000. A second drawback is that – from a

group dynamics perspective - these instruments conceivably lead to ‘stress tests’ in case of default.

I.e., a participating bank with a defaulted loan will be under severe scrutiny from the other

participating banks, maybe imputing bad intentions from the beginning. However, by including a

mediation function as depicted in Figure 9 who in case of default is able to verify that the rating has

been achieved in accordance with the Verbundrating or DSGV-Rating it is possible to mitigate this

problem considerably.

However, there are also advantages to be noted. Compared to competing, market-based solutions,

such as the multi-seller instruments described above, basket transactions have probably lower

transaction costs. Information asymmetries are likely to be greater between an originating bank

and outside market investors than among risk exchanging participants, who are both protection

sellers and protection buyers. Participants can employ their own screening technologies combined

with local market knowledge to assess the credit risk in the pool. Also, participating banks are

probably more willing to share relevant information on loan quality and productivity levels with

non-competing peers than with a rating agency or a large number of outside investors. Since

information asymmetries have been identified to be a major impediment to transferring credit risk

by market transactions55, it can be suggested that multi-bank pro-rata pools provide a cost-efficient

instrument to diversify credit risk. Moreover, it can be assumed that the cost of administering a

multi-bank loan pool is lower than the combined costs for trust managers, investment banks,

lawyers etc that originator banks face in the context of multi-seller CLO transactions, although it

mus be noted that e.g. DG Hyp has achieved such a high degree of standardisation (e.g. through

master agreements 56 etc.) that cost aspects cannot be cited as a disadvantage of multi-seller

instruments, at least in the co-operative mortgage loan sector.

6 Shortcomings and perspectives for future development This section seeks to derive future perspectives of credit risk transfer based on three issues. Firstly,

one might be able to gain insight into future developments by a comparison with foreign markets.

Secondly, Basel II changes the way that regulatory capital charges are calculated when a bank uses

credit derivatives. Lastly, as far as public sector banking in Germany is concerned, the phasing out

of the existing state guarantees for German public-sector financial institutions (Anstaltslast and

Gewaehrtraegerhaftung) might have implications for the usage of credit risk mitigation instruments.

55 Eisele, Florian and Neus, Werner (2003), Asset-Backed Securities, Informationsasymmetrien und Regulierung, in:

Knobloch, Alois and Kratz, Norbert, Neuere Finanzprodukte, p. 233-264 56 See also Association of German Banks 2001a and 2001b


6.1 Descriptive Analysis

6.1.1 German perspectives

From the present community of innovative leaders there will be one to three intermediaries who

will emerge from the highly fragmented competition of originators (savings banks and cooperative

banks) and the capital market. Their core competences will consist in purchasing and bundling

portfolios and in placing these on the capital market as a whole. Also on the capital market side this

will lead to the standardisation of products and documentation. Factors for success will be a high-

performance technology, know-how, market access and the integration into extensive originator

software. Furthermore, European harmonisation will take place in the long term partially adjusting

legal frameworks and standards in the securitisation process. This development will additionally be

driven by the abolition of the so called “Staatsgarantie”, a state guarantee in the savings bank sector

which will generate bank ratings far lower than their current AAA. From the investor’s point of

view a consolidation of the Pfandbrief and securitisation market will take place, major initiators

being the analytical approach of the rating agencies as well as the development of Pfandbrief-like

covered bond structures. The presently heterogeneous securitisation structures will also be

readjusted with the establishment of only a few intermediaries.57

Germany continues to present an attractive environment for German banks to sell potentially risky

loan portfolios and for international investors to benefit from their experience in managing and

working-out of NPL portfolios. The 2004 transactions of Hypo Real Estate and Dresdner Bank

show alternatives of how NPL portfolios can be structured as share deals (with a prior drop-down)

in order to address legal concerns, including with respect to banking secrecy58. On the other hand,

the May and November 2004 decisions by the Frankfurt Regional Court and the Koblenz Regional

Court confirm that the direct transfer of NPL portfolios by way of an asset deal is not prevented by

banking secrecy laws and, thus, may remain a viable option. The decisions being subject to appeal,

it remains to be seen if the creditor-friendly approach will stand up against challenge in the

appellate stage.

6.1.2 Perspectives affecting different countries

The securitization of public-sector receivables generally serves to relieve public budgets. Such

transactions have already been carried out in Italy, Spain and the Netherlands, for example. In

response to this development, EUROSTAT (the Statistical Office of the European Communities)

has defined criteria which the securitization of public-sector receivables has to fulfill in order to be

included in deficit calculations.59

In the securitization of delinquent loans, extremely risky receivables are deliberately placed in the

pool in order to reduce risk and tied-up capital for the bank and to improve the risk/return profile of

57 Kretschmar, Damaske (2003), p. 8-9 58 Grumbach (2005), p. 34 59 http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-BE-03-001/EN/KS-BE-03-001-EN.PDF


the portfolio of receivables. In individual cases, however, losses will also have to be realized due to

the market- based valuation of receivables. However, receivables in which payment streams are

highly volatile and can only be predicted with difficulty can, in principle, also be securitized.

In recent years, we have also seen an increasing number of new types of receivables in

securitization transactions (i.e. those which have not been securitized in the past), for example

receivables from license and patent fees, stadium revenues, and revenues from businesses such as

pubs or funeral homes. These receivables are generally securitized in so-called whole business

securitizations (WBSs), in which all of the payment streams for a company (or part of a company)

are assigned to the special-purpose vehicle. WBSs are generally carried out in connection with

corporate takeovers and have remained a rather secondary market segment to date.

In the future, we can expect to see the increased convergence of synthetic securitization transactions

and true-sale structures. Even today, credit-linked notes can be used to provide partial funding in

synthetic securitization transactions. Furthermore, receivables do not necessarily have to be

removed from the balance sheet explicitly in a true-sale structure in order for reduced regulatory

capital requirements to be recognized under Basel II.60

In the future, Pfandbrief mortgage bonds and securitization are also likely to see increased use as

mutual complements in the structure of transactions. Pfandbrief mortgage bonds are distinguished

from securitization transactions by the following characteristics61:

• The receivables remain on the originator’s balance sheet, thus the originator is still forced to

bear the corresponding credit risk

• There is no direct connection between the payments arising from the receivables used as

collateral and the payments disbursed to investors. In addition to the receivables used to

secure the Pfandbrief, the issuing bank’s overall assets serve as liability assets for the

investors

• The composition of coverage capital can change over time

• Pfandbrief mortgage bonds can only be issued by banks which have been granted the legal

right to do so (Emissionsprivileg).

In several European countries which do not have a law regarding this type of bond (e.g. England

and Italy), a securitization structure very similar to Pfandbrief mortgage bonds is currently being

developed. In these structures, defined receivables on the originator’s balance sheet are segregated

for separate refinancing, with the revenue streams arising from those receivables being used to

repay bonds issued for that specific purpose. On the other hand, in some European countries which

do have laws regulating Pfandbrief mortgage bonds, separate securitization laws have been passed

60 Emse (2005), p. 306 – 311 61 Maier (2004), p. 142. Maier lists 8 points all of which are not reproduced here.


or are currently being discussed, which means that a separate legal framework is being set up for

securitization (similar to the existing framework for Pfandbrief mortgage bonds).62

6.1.3 iTraxx Products

One of the most significant developments in financial markets in recent years has been the

creation of liquid instruments that allow for the trading of credit risk correlations. Prime among

these instruments are CDS index tranches. We have to remember that CDS contracts63 are already

more liquid than most corporate bonds for the following reasons: First, they are more standardised.

For instance, the credit events that trigger payment to the protection buyer are now clearly defined

in the ISDA credit derivatives definitions. This is also the case for the settlement method. Second,

CDS contracts allow market participants to go long credit risk without a cash payment, as well as go

short credit risk with less difficulty and at lower cost than with corporate bonds. A CDS index

contract is an insurance contract covering default risk on the pool of names in the index. Index

contracts differ slightly from single-name securities. The main difference is that a buyer of

protection on the index is implicitly obligated to pay the same premium, called the fixed rate, on all

the names in the index. In addition, index contracts restrict the eligible types of credit events to

bankruptcy or failure to pay, ie excluding debt restructuring as a triggering event. In the case of a

credit event, the entity is removed from the index and the contract continues (with a reduced

notional amount) until maturity (see below). However, as mentioned the huge advantage of these

products is the enhanced liquidity over single name instruments by (among other reasons) the

emergence of widely accepted benchmark indices, which comprise the most liquid single-name

CDS contracts in the market and have a group of global dealers committed to market-making.

The International Index Company was created in 2004 in a merger between iBoxx Ltd. and Trac-x

LLC and has continued the iBoxx bond index as well as the derivative index in Europe, Japan and

North America. The bond indices are marketed under the name Dow Jones iBoxx, while the CDS

indices are known as Dow Jones iTraxx. This index consists out of a basket of 125 equally-

weighted CDS on European debt names (0.8% each). If EUR 10 million are traded, then the

protection seller takes on the risk of EUR 80,000 for each debtor traded in the index. If the debtor

triggers a credit event, then the corresponding part is settled like a ‘normal’ CDS. The contract

continues to run with 124 names and a reduced nominal of EUR 9,920,000. There are numerous

subindices, that are being structured according to regional criteria (e.g. Europe (see , North America,

Emerging Markets64, …) or to default criteria (investment grade, high yield, …).

62 Österreichische Nationalbank (2004), p. 16 63 A single-name CDS (see 2.1) contract is an insurance contract covering the risk that a specified credit defaults.

Following a defined credit event, the protection buyer receives a payment from the protection seller to compensate for credit losses. In return, the protection buyer pays a premium to the protection seller over the life of the contract.

64 ‘Something remarkable happened in 2004 in the world of emerging market structured finance. For the first time, domestic issuance of structured debt in Latin America surpassed that of cross-border issuance. At first glance, this may not appear to be incredibly noteworthy, but it represents a watershed event in how emerging market economies globally are beginning to finance themselves. Rather than relying on cross-border lenders and accepting the volatility and currency mismatch this generally entails, domestic borrowers in the emerging markets are seeing


6.2 Results from expert interviews

This section describes in an aggregated way the highlights of the three expert interviews that were

conducted over the time period of this master thesis. The interviewees were Mr. Michael Damaske,

Managing Director, Head of Institutional Clients, Hypoport AG, Berlin, Mrs. Sabine Rahn, Senior

Portfolio Manager, Dr. Frank Lehrbass Head of Portfolio Management & Structured Credit, Credit

Treasury, both Deutsche Genossenschafts-Hypothekenbank AG, Hamburg, and Mr. Tom

Beckmerhagen, Asset- and Liability-Management Specialist, Deutsche Postbank AG, Bonn.

Consequently this section elaborates on their views with respect to

1. The assessment of available instruments for credit risk transfer

2. The challenges faced by the market participants

3. The influence of regulatory and other ‘non-business’ regulations, as well as

4. An individual opinion on the future development.

1. For medium-sized, regional banks there are effectively three ways available to transfer credit

risk. Firstly, it is possible to enter a credit default swap as a protection seller with a central

institution and pay the premium, and the central institution subsequently passes the risk on to

the capital market. This is a classical multi-seller transaction that is e.g. offered in the co-

operative banking sector by the DG Hyp for the mortgage loan segment. After the rescinding of

the German Mortgage Bank Act (Hypothekenbankgesetz) the DG Hyp is allowed to sell

protection via credit default swaps “on demand”. The DG Hyp subsequently transfers the risk,

including the first loss pieces, into the capital markets. Secondly, a Sparkasse or Volksbank can

participate in a basket-transaction. These are offered by both the Finanzverbund as well as the

Sparkassen-Finanzgruppe although not in each and every case. For example, the DG Hyp

currently offers for mortgage loans only multi-seller transactions because it is felt that these are

highly demanded by the medium-sized banks. Moreover, it reflects their own risk management

philosophy in the sense that it it useful to outplace the concentration risk in its entirety outside

the Finanzverbund. Thirdly, is is also possible to physically sell a loan in a portfolio trading

sense, i.e. without securitisation. This is possible for performing as well as for non-performing

loans. Part of the cooperative banking sector for example is a professional service provider for

everything to do (including servicing) with non-performing loan portfolios, the IMMOFORI.65

Again, the idea is in this case to transfer the risk into the capital markets and not to keep it

internally. On the other hand, performing loans are bought and kept on-balance by the DG Hyp.

2. Sponsoring organisations have pointed out that the seller organisations not only have to bear

costs associated with securitisations but that especially central institutions had to develop a

sound understanding for the idea behind credit risk transfer. As far as the cost is concerned it is

greater and greater access to long-term local currency financing in their own markets. Structured finance has been an important component in allowing this to happen’, Lee Meddin, International Financial Corporation

65 Immofori Gesellschaft für Immobilien Forderungsinkasso mbH, www.immofori.de,


not only the gathering of data at the beginning of the transaction but as important is the ongoing

reporting over the lifetime of a transaction. In that respect the most criticical issue is probably to

understand the own IT systems and to answer questions concerning data sources, reliability of

information, data analysis and the implementation of a reporting process. There is no way

around operational changes as well as the conceptualisation of a risk management strategy as

the foundation of all credit risk transfer activities. Twenty years ago, the interest rate swap and

options market was at a similar stage and following operational breakdowns, market participants

invested in systems which captured all the features of the swap and which could process the

complex and ever increasing volumes of trades. A significant investment of resource and time

will be required to address similar issues for credit derivatives and asset-backed securities.

3. All experts agree that in the medium term, the reform of the minimum capital requirements

enacted by Basel II will have an influence on the credit risk transfer market. There are, however,

no commonly shared views with respect to the overall result. On the one hand, Basel II will

improve the availability of ‘clean’ data because it forces banks to store more and better data.

The data needed for the implementation of an internal loan rating is essentially the same that

rating agencies in a securitisation transaction are supplied with. The computation of

probabilities of default for a debtor are a ‘huge step in the right direction’. On the other hand,

capital requirements prior to securitisation will, in the future, match the banks’ needs for

economic capital much more closely, owing chiefly to the change in the risk weighting for the

underlying asset classes in both the Standardised Approach and the Internal Ratings-Based (IRB)

Approach. This will also lessen the incentive to reduce risk weight assets by securitising

exposures (all else being equal), i.e. some experts believe that especially synthetic transactions

loose their attractiveness. The new mortgage banking act means that German mortgage banks,

like DG Hyp, will have greater scope to deploy credit risk transfer instruments more flexibly in

the future in order to achieve their specific business policy objectives. Another aspect is

accounting because German GAAP as well as IFRS have specific regulations concerning the

consolidation of special purpose entities (SPEs). To avoid consolidation for a true sale

transaction is not evident. Since German GAAP is the foundation for supervisory law, the

consolidation of a SPE would have far reaching consequences. In this case, the benefits of a true

sale transaction would be reduced to refinancing and this is a doubtful benefit, because it can be

achieved more easily through more established products like covered bonds (no rating agency

mandate, no creation of an SPV etc.). Even financial ratios would not be improved.

4. That being said, however, other experts believe that we will see more and more true sale

transactions at the expense of synthetic transactions. First of all, it is commonly acknowledged

that the TSI GmbH has done a good job in Germany in order to foster true sale transactions.

Secondly, it is being felt that investors are more inclined towards true sale notes and that these

ABS pose a true alternative to investments in synthetic structures but that synthetic transactions


are far from fading out. The covered bond in Germany will remain, but will decrease slightly.

Other countries will see more covered bond laws and refinancing via covered bonds will take

place more often. In the UK, for example, almost only RMBS True Sale are existent, which

should be redirected more towards covered bonds. For small and less standardised portfolios

there will always be a market for pro-rata products like the basket transactions offered to small

savings banks or Kreditgenossenschaften. The same holds true for synthetic structures whenever

a bank quickly needs to ‘free’ risk assets. A nice example in this respect is the take-over of

HVB. In this case a bank does have a problem when asking the question where to get regulatory

capital from. And to raise capital does not make sense under certain circumstances and maybe

the bank would like to sell parts of the old group but this does not happen that fast. In this case it

is nice to transfer credit risk via a securitisation (which of course is costly but taken into account

all aspects it still is a reasonable solution) which after I regained my capital quota will allow me

to keep my rating, subsequently I sell assets, I work on my non-performing loans, and after

everything settled, the asset backed commercial papers will mature or I call them. According to

some experts, this scenario will happen a lot.


7 Conclusion There is an abundancy of literature on credit derivatives, asset-backed securities and (increasingly)

on non-performing loans. These are all instruments for credit risk transfer. From a risk management

perspective, interest rate risk has dominated the work of practitioners until recently. Credit risk is

taking a more and more prominent role in bank management. Consequently, the beginning of this

paper focused on the motivation for using different instruments in different situations. The author

(where possible without missing the point) refrained from reproducing diagrams that display typical

structures and refers to publications. Most segments of the credit risk transfer markets are global

markets with the counterparties often domiciled in different countries. It is therefore more

appropriate to refer to the participation of German banks in the market as a whole than to a German

market (see 3). A very important drawback of those instruments that has hindered the usage by

especially smaller banks are all issues concerning pricing. Due to the illiquidity of markets,

valuation models are the only possibility because market prices are not available. Chapter 4 started

by outlining the reasons for the requirement of determination of fair value. The chapter continued

by giving an overview of information sources that can be contacted. In addition to rating agencies,

market data providers constitute an important source for key input data. Bloomberg and Reuters

dominate a highly fragmented market and were more described in a representative way.

Securitisation platforms are a new medium for asset-backed securities that serve both investors as

well as originators. As far as the German market is concerned there are only a few players currently

present. Last but not least, loan exchanges and auction places are an emerging but yet not existing

segment. Several ideas in this direction have never been put into practice or are only with a

tremendous dealy being taken a step further. Chapter 5 compared credit risk transfer in the public

and co-operative banking sector in Germany by elaborating on the instruments used by market

players including their pros and cons. This master thesis closed with an outlook that is comprised by

a descriptive part as well as results from interviews with market representatives.

I have personally and independently written the thesis and that he has not used any but the sources

quoted in footnotes.

__________________________________________________________Frankfurt, August 16, 2006

(Clemens Schun)


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Melennec, Olivier (2000): CBO, CLO, CDO: A Practical Guide for Investors, URL: http://www.securitization.net/pdf/cdo_en2.pdf, (August 17, 2006). Merrill Lynch (2003): Credit Derivative Handbook 2003, URL: http://www.cema.edu.ar/conferencias/download/CDS20.8.pdf, (August 17, 2006). Merton, Robert C. (1974): On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, in: Journal of Finance, Vol. 29, No. 2, pp. 449-470. Moody’s Investors Service (2003): 2002 Review and 2003 Outlook - German Structured Finance: Record Volume of Term Transactions and Further ABCP Growth, URL: http://www.moodys.com/moodys/cust/search/syn_srch_research_result.aspx?search=5&searchQuery=2002%20Review%20and%202003%20Outlook&searchIdent=qcksearch, (August 17, 2006). Moody’s Investors Service (2004): 2003 Review and 2004 Outlook German/Austrian/Swiss Structured Finance: Term Transactions Consolidate While ABCP-Market Continues Positive Growth Trend, URL: http://www.moodys.com/moodys/cust/research/MDCdocs/12/2002400000433828.pdf?search=5&searchQuery=2003+Review+and+2004+Outlook&click=1, (August 17, 2006). Moody’s Investors Service (2005): 2004 Review and 2005 Outlook, German/Austrian/Swiss Structured Finance: Growth Potential and New Challenges, URL: http://www.moodys.com/moodys/cust/research/MDCdocs/12/2003000000446432.pdf, (August 17, 2006). Moody’s Investors Service (2006a): 2005 Review and 2006 Outlook German/Austrian/Swiss Structured Finance (German Translation), URL: http://www.moodys.com/moodys/cust/research/MDCdocs/12/2004900000423954.pdf?search=5&searchQuery=2005+Review+and+2006+Outlook&click=1, (August 17, 2006). Moody’s Investors Service (2006b), URL: www.moodys.com, (August 17, 2006). Neue Plattform für True-Sale-Verbriefungen. Modell soll rasch Zustimmung von Kartellamt und BaFin finden – KfW: Erste Transaktion im Frühjahr, in: Börsen-Zeitung, No. 240, December 12, 2003, p.. 18. Österreichische Nationalbank (2004): Guidelines on Credit Risk Management – Best Practices in Risk Management for Securitized Products, URL: http://www.nationalbank.at/en/img/lf_securit_engl_tcm16-23501.pdf, (August 17, 2006). Piaskowski, Friedrich (2004): Immobilienkreditportfolios aktiv managen. VR Immo soll für Wettbewerbsvorteile in der Immobilienfinanzierung sorgen, in: Börsen-Zeitung, No. 36, p. B7. Picone, Domenico (2002): Collateralised Debt Obligations, Working Paper, City University Business School, URL: http://avikram.freeshell.org/uploads/50.pdf, (August 17, 2006). Reporting Online GmbH (2006), URL: http://www.reporting-online.com/, (July 31, 2006). Standard & Poor’s (2002): Global Cash Flow and Synthetic CDO Criteria, Standard & Poor’s Structured Finance, URL: http://www2.standardandpoors.com/spf/pdf/fixedincome/cdo_criteria2002_FINALTOC.pdf, (August 17, 2006). Standard & Poor’s (2005a), URL: www.standardandpoors.com, (August 17, 2006). Standard & Poor’s (2005b): Rating Transitions 2004: U.S. RMBS Stellar Performance Continues to Set Records, Standard & Poor’s Structured Finance, URL: http://www.securitization.net/pdf/sp/Rating_Tran_21Jan05.pdf, (August 17, 2006). Standard & Poor’s (2006), RatingsDirect Login, URL:https://www.ratingsdirect.com/Apps/RD/controller/LoginPage, (August 15, 2006). Stinner, J.; Dech, H. (2003): Strategische Einsatzmöglichkeiten der Kreditverbriefung, in: Immobilien & Finanzen, 6 - 2003, pp. 193-195. The Bond Market Association (2006 a): Asset Backed Securities Outstanding By Major Types of Credit 1995 - 2006:Q1, URL: http://www.bondmarkets.com/story.asp?id=84, (July 20, 2006). The Bond Market Association (2006 b): Debt Markets Represented by The Bond Market Association—2006 Q1, URL: http://www.bondmarkets.com/story.asp?id=98, (July 20, 2006). The Bond Market Association (2004): An Investor’s Guide to Asset-Backed Securities, URL: http://www.bondmarkets.com/assets/files/AssetBackedSec04.pdf, (August 17, 2006). The Bond Market Association (2002): An Investor’s Guide to Pass-Through and Collateralised Mortgage Securities, URL: http://www.freddiemac.com/mbs/docs/about_MBS.pdf, (August 17, 2006). True Sale International GmbH (2006), URL: http://www.true-sale-international.de/index.php?id=54, (July 31, 2006). Verbriefungsinitiative verfehlt gestecktes Ziel (2005), URL: http://www.handelsblatt.com/news/Default.aspx?_p=200039&_t=ft&_b=935898, (2006, July 20). Wannhoff, Jürgen; Grabau, Maik; Schlee, Klaus (2005): MaRisk biegen auf die Zielgerade ein, in: Die Sparkassen Zeitung, No. 27, p. 7. Ward, W. and S. Wolfe (2003): Asset backed securitisation, collateralized loan obligations and credit derivatives, in Victor Murinde and Andy Mullineaux (eds.) Handbook of International Banking, Edward Elgar Publishing Ltd.


9 Appendix I: Screenshots

Figure 10 - Deal information on Moody’s.com

Figure 11 - Debt description on Moody’s.com


Figure 12 - Deal summary on www.fitchratings.com

Figure 13 - Credit Ratings Search on Standard & Poor’s


Figure 14 - More specific information on a trance on S&P’s website

Figure 15 - Ford Motor Credit Company CDM 5-Year MODR Spread History


Figure 16 - AutoZone, Ford Motor Creditand GM Acceptance Corp. Credit Curves

Figure 17 - CDS quotes for automotive/tranport sector companies


Figure 18 - CDS quotes for telecom sector companies

Figure 19 - CDS quotes for utilities sector companies

Figure 20 - CDS Prices provided by CreditTrade on Reuters66

66 Source: WHU


Figure 21 - High-quality compilation of deal summary on Europace CM (2006c)

Figure 22 - performance data on Europace CM (2006d)


Figure 23 - Contact data on Europace CM (2006e)

Figure 24 - Deal Summary on ABSNet


Figure 25 - Site map of HSF (2006)

Figure 26 - Deal selection on Reporting Online GmbH (2006)


Figure 27 - Details for Europa One

Figure 28 - Deal Site for EuroHypo 2001-1

Figure 29 - This page shows a selection of CreditTrade Benchmark Prices for European Corporates


10 Appendix II: Questionaires This thesis was drafted considering input from three interviews with practitioners representing a

mortgage bank, a software and consulting company specialising in securitisations and lastly a

securitisation plattform that tries to integrate investors and originators. These interviews were

conducted in German. The essence of the respective answers has been integrated into this thesis.

However, for documentation purposes the original German Q&A are given in this appendix.

Interview with Dr. Frank B. Lehrbass, Head of Portfolio Management & Structured Credit, Credit

Treasury Deutsche Genossenschafts- und Hypothekenbank, and Mrs. Sabine Rahn, main contact for

the Proscore transactions. The interview took place by phone on July 26, at 5:30 p.m.

1. In der Literatur wird davon gesprochen, dass das „Buy and Hold“ Geschäftsmodell (also

Kredite bis zur Fälligkeit zu halten) zunehmend durch eine aktive Portfoliosteuerung ersetzt

wird. Gibt es einen Wechsel des Geschäftsmodells auch in den Sparkassen und Raiffeisen-

und Genossenschaftsbanken?

2. In einer Pressemitteilung vom 6. Juli hat die Commerzbank die „TS Co.mit One“ vorgestellt:

„Die Commerzbank bietet ihren mittelständischen Kunden als erste Bank ein

Schuldscheinprodukt an, das gezielt für eine Kapitalmarkttransaktion entwickelt wurde.

Dadurch entsteht für diese Unternehmen erstmalig die Möglichkeit, von Portfolioeffekten

und Refinanzierungsvorteilen über eine Kapitalmarkttransaktion zu profitieren…“. Wie ist

es bei den Volksbanken um die Möglichkeiten des Kundenhandels bestellt? Welche

Produkte werden den mittelständischen Kunden einer Kreditgenossenschaft angeboten?

3. Wie beurteilen Sie die Kreditrisikotransfermöglichkeiten für einzelne Volksbanken?

Sicherlich hat sich hier in den letzten fünf Jahren die Situation rasant verändert, bspw. bei

den Möglichkeiten für Verbriefungen. Trotzdem stellt sich die Frage, ob es aus Sicht der

kleineren Institute noch Schwachstellen gibt. Wenn ja, wo kann sich was verändern? Bitte

geben Sie einen kurzen Ausblick.

4. Was sind Ihrer Meinung nach die aktuell grössten Probleme und Schwierigkeiten beim

Kreditriskotransfer, denen sich kleinere Institute ausgesetzt sehen? Bei welchen Produkten

sehen Sie noch Nachholbedarf? (gewerbliche Kredite, private Hypothekenkredite etc.)

5. Mittelständische, regionale Banken (wie z.B. Volksbanken oder Sparkassen) haben beim

Handel von Adressenrisiken grundsätzlich zwei Alternativen: Zum einen den Handel

innerhalb von Verbundorganisationen, zum anderen den Handel über Organisationen

hinweg. Was sind aus Ihrer Sicht die mit beiden Alternativen verbundenen Vor- und

Nachteile, vorausgesetzt beide Alternativen stünden einem Institut praktisch zur Verfügung?

6. Kleine Institute haben keine solch großen Portfolien, um aktives Portfolio-Management, wie

im Lehrbuch beschrieben, zu betreiben. So haben kleinere Institute nur die Möglichkeit,


Teilportfolien auszuplatzieren. Aufgrund der fixen Transaktionskosten lohnt sich die

Verbriefung erst ab einer gewissen Portfoliogröße. Welche Möglichkeiten haben die

Zentralinstitute geschaffen, um kleineren Instituten Zugang zu diesen Instrumenten zu

veschaffen?

7. Welche Rolle spielen andere Verbundpartner? Welche Genossenschaftsunternehmen sind im

(genossenschaftlichen) Kreditrisikotransfermarkt noch aktiv? Welche Bedeutung haben

Nicht-Banken (z.B. Leasing-Gesellschaften, Versicherungen etc.)?

8. Was würden Sie einer Genossenschaftsbank entgegnen, die eine „fehlende

Verbundlösung“ als Grund für die Zurückhaltung der Genossenschaftsbanken im Thema

Verbriefungen anführt?

9. Was würden Sie einer Genossenschaftsbank entgegnen, die keine Notwendigkeit für eine

Verbriefung sieht, da sie nach eigenen Angaben über ein gut diversifiziertes Kreditportfolio

verfüge und somit auch keine Klumpenrisiken vorhanden seien?

10. Wenn Sie einen Blick in die Zukunft wagen, was sind Ihrer Meinung nach die kommenden

Entwicklungen? Welches sind die Auslöser für die Veränderungen? (bspw. im

regulatorischen Umfeld).

11. Gibt es andere (europäische) Länder, die im Hinblick auf den Markt für Kreditrisikotransfer

weiterentwickelt sind und bei denen Sie davon ausgehen, dass Deutschland einen

vergleichbaren Weg einschlagen wird? Inwiefern ist der deutsche Markt außergewöhnlich?

________________________________________________________________________________ Interview with Mr. Martin Damaske, Member of the Management Board of Hypoport AG,

Authorised Signatory. The interview took place by phone on July 25, 2 p.m.

1. Portfoliomanager, Strukturierer und institutionelle Investoren fordern in zunehmendem

Maße umfassendere Informationen. Von besonderer Bedeutung sind

Pricinginformationen zur Bestimmung des fair value (z.B. für den Weiterverkauf ) oder

der Risikomessung.Bei welchen anderen Informationsbedürfnissen stellen sich in der

Praxis die größten Probleme?

2. Welchen Nutzen bietet EUROPACE auf dem Gebiet des Portfoliohandels und der

Verbriefung? Was ist das einzigartige an „EUROPACE for investors“ und

„EUROPACE for issuers“? Welche anderen Systeme am Markt unterstützen den Handel

von Risikopositionen? Was bietet Ihre Softwareplatform Creditshare? Ist es möglich, ein

Login zu erhalten?

3. Wie beurteilen Sie den deutschen Markt für Verbriefungsdienstleistungen? Wie ist die

Hypoport AG positioniert? Welche Wettbewerber bzw. alternativen Systeme gibt es?

4. Die Hypoport AG hat mittlerweile Referenzen in allen Banksektoren

(genossenschaftlich, öffentlich-rechtlich und privat). Welche Besonderheiten erkennen


Sie im Handel mit Adressenrisiken innerhalb von Verbundorganisationen vis-a-vis über

Organisationen hinweg?

5. Welche Möglichkeiten haben insbesondere kleinere Institute (Sparkassen, Volksbanken)

um folgenden Herausforderungen im Zusammenhang mit Verbriefungen zu begegnen:

� Anpassung operationeller Abläufe

� Risikomanagement

� Reporting und Informationstransparenz

� Technische Anforderungen (IT)

� Investoren-Reporting

6. Wie wird sich Ihrer Meinung nach der Verbriefungsprozess (bspw. aufgrund

gesetzlicher Entwicklungen wie etwa Basel II oder dem Einsatz neuer Kreditderivate) in

den kommenden Jahren verändern?

7. In den letzten Jahren hat man in Deutschland viel getan, um Markthindernisse zu

beseitigen (Stichworte sind Gewerbesteuer, Refinanzierungsregister, Gerichtsurteil zum

Forderungsverkauf). Trotzdem bleibt die Frage, ob die Rahmenbedingungen in

Deutschland optimal geworden sind. Was ist Ihre Meinung hierzu?

________________________________________________________________________________

Interview with Tom Beckmerhagen, Deutsche Postbank AG, Bonn. The interview took place by

phone on July 31, 1 p.m.

1. Gibt es Unterschiede im Kreditrisikotransfer und –handel zwischen Bausparkassen und

Universalbanken? Welche Unterschiede bestehen innerhalb dieses Spezialmarkts?

Unterscheidet sich bspw. die Strategie der BHW mit ihren Provide-Blue Transaktionen von

der Beteiligung der BSH an Provide-VR Transaktionen?

2. Wer sind die Investoren der CLN der BHW bzw. Provide Blue? Tritt die BHW auch als

Investor am MBS Markt auf?

3. Die BHW hat seit 2002 bereits sechs Verbriefungstransaktionen über die PROVIDE-

Plattform in Höhe von insgesamt EUR 11,7 Mrd. abgeschlossen. BHW ist damit derzeit der

größte Nutzer der PROVIDE Plattform.Was hat sie seinerzeit dazu bewogen die Plattform

der KfW zu nutzen? Welche Argumente haben für den Aufbau einer eigenen

„Infrastruktur“ gesprochen? Was wäre an der Provide Plattform zu optimieren?

4. Hat die BHW jemals über eine True Sale Transaktion nachgedacht? Wie beurteilen Sie die

Wahrscheinlichkeit einer solchen Transaktion für die Zukunft? Wäre es denkbar, dass in

einem solchen Fall die Servicer Funktion nicht von der BHW Bausparkasse AG

wahrgenommen würde?

5. Aus volkswirtschaftlicher Sicht wird oftmals angeführt, dass mittels der erzielten

Eigenkapitalentlastung bei den verbriefenden Banken die breite Versorgung mit

Wohungsbaudarlehen weiterhin sichergestellt werden kann. Was waren/sind die


Hauptmotive der Verbriefung für die BHW? Wie schwer wiegt das Argument der EK-

Entlastung in der Praxis wirklich?

6. Die Ratingagenturen verlangen- was die quantitativen Daten angeht - die Befüllung eines

templates, z.B. German RMBS Portfolio template von S&P. Welche Daten bereiten bei der

Beschaffung die größten Probleme? Hatte die BHW jemals „gaps“ in der

Datenbereitstellung?

7. Für das Investorenreporting haben sich bislang keine einheitlichen Standards durchgesetzt.

Jeder reported das, was er für richtig hält, überspitzt gesagt. Wie ist hier die Vorgehensweise

der BHW? Welche Informationen sind aus Investorensicht besonders wertvoll?

8. Wenn Sie die erste mit der letzten Transaktion vergleichen, welche „Fehler“ hat die BHW

anfänglich gemacht? Wie sah der Optimierungsprozess aus? Welche „Fehler“ haben

besonders weh getan? Was würden sie Neueinsteigern raten?

9. Wie ist das Verbriefungsgeschäft bei der BHW aufbauorganisatorisch aufgesetzt? Welche

Best Practice ansätzen kennen Sie bei der operationellen Umsetzung von Verbriefungen?

10. Auch die Postbank hat bereits mit ihrer Domicile Transaktion im Jahre 2003 ein

Wohnungsbaukreditportfolio verbrieft. Gab es bzw. gibt es Unterschiede in der

„Verbriefungsstrategie“ beider Häuser? Welche Gemeinsamkeiten gibt es? Wie wird sich

das fusionierte Institut zukünftig aufstellen?

11. Wenn Sie einen Blick in die Zukunft wagen, was sind Ihrer Meinung nach die kommenden

Entwicklungen? Welches sind die Auslöser für die Veränderungen? (bspw. im

regulatorischen Umfeld).

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