Diseño de los elementos de la instalación

Initially the use of registered bonds was mainly driven by the application of international accounting standards (IAS), as they allow investing in debt products that are recognised as loans and receivables in the financial assets framework of IAS 39.9. As the capital market environment became more stressful over the past three years, the incentives to use these non-liquid fixed income instruments grew substantially. The covered bonds of those issuers at the forefront of this development, namely Austria, France, Germany, Ireland and Luxembourg, as well as some Scandinavian issuers, were generally less exposed to spread volatility compared to their peers, as they were in a position to smoothly replace their funding through benchmark securities with registered bonds.

According to regulation 1606/2002 of the European Parliament and of the council of 19 July 2002, since 2005, publicly-traded companies are required to apply a single set of high- quality international accounting standards for the preparation of their consolidated financial statements. The regulation explicitly refers to the international accounting standards set by the International Accounting Standards Board (IASB), a private group of international accounting experts. A key part of the framework is the definition of different categories of financial assets. IAS39.9 defines four major categories of financial assets. These are: 1) financial assets at fair value through profit or loss; 2) available for sale; 3) loans and receivables; and 4) held to maturity. Figure 56 describes the decision process for the designation of different financial assets to these four categories17_.

There is an important difference between ‘loans and receivables’, ‘held to maturity’ and the remaining two categories. The former allow disclosure of the respective assets at amortised costs18_{, while assets in the “fair value through profit or loss” category must be disclosed at}

fair value with an effect on the profit and loss statement. Assets in the “available for sale” category must be disclosed at fair value without an effect on the profit and loss statement. This means that if the fair value of assets that are designated to the ‘loans and receivables‘ or ‘held to maturity’ categories move above amortised costs, the company creates unrealised gains and if it moves below amortised costs, it creates unrealised profits. By increasing the share of assets that can be designated to these two categories, companies that report under IAS are able to reduce the volatility of their income statements and more easily smooth out fluctuations in their capitalisation. It is also worth noting that the appeal of the ‘loans and receivables’ category is stronger than the ‘held to maturity category’, as

17 _{For further reading please refer to the IASB homepage: http://www.iasb.org}

18 _{According to IAS39.9, amortised cost is the amount at which the financial asset is measured at initial recognition minus}

principal repayments, plus or minus the cumulative amortisation and minus any reduction for impairment or uncollectability. Fritz Engelhard

+49 69 7161 1725 [email protected]

Non-liquid fixed-income instruments – no longer a purely German affair

Four main categories of financial assets defined in IAS 39.9

The particular appeal of the ‘loans and receivables’ category

Figure 56: Categorisation of financial assets according to IAS 39.9

Financial Instrument

Near-term sale? OR derivative? OR designated as at “fair value through profit or loss"?

Fixed or determinable payments?

Quoted in an active market?

Designated as “available for sale"?

Fixed maturity? AND positive intention and ability to hold to maturity AND not designated as

“available for sale"?

Financial Asset s at Fair Value

Through Profit or Loss Available for Sale Loans and Receivables Held to Maturity

Yes No Yes Yes Yes Yes No No No No Financial Instrument

Near-term sale? OR derivative? OR designated as at “fair value through profit or loss"?

Fixed or determinable payments?

Quoted in an active market?

Designated as “available for sale"?

Fixed maturity? AND positive intention and ability to hold to maturity AND not designated as

“available for sale"?

Financial Asset s at Fair Value

Through Profit or Loss Available for Sale Loans and Receivables Held to Maturity

Yes No Yes Yes Yes Yes No No No No Financial Instrument

Near-term sale? OR derivative? OR designated as at “fair value through profit or loss"?

Fixed or determinable payments?

Quoted in an active market?

Designated as “available for sale"?

Fixed maturity? AND positive intention and ability to hold to maturity AND not designated as

“available for sale"?

Financial Asset s at Fair Value

Through Profit or Loss Available for Sale Loans and Receivables Held to Maturity

Yes No Yes Yes Yes Yes No No No No Financial Instrument

Near-term sale? OR derivative? OR designated as at “fair value through profit or loss"?

Fixed or determinable payments?

Quoted in an active market?

Designated as “available for sale"?

Fixed maturity? AND positive intention and ability to hold to maturity AND not designated as

“available for sale"?

Financial Asset s at Fair Value

Through Profit or Loss Available for Sale Loans and Receivables Held to Maturity

Yes No Yes Yes Yes Yes No No No No

Source: IAS 39.9, Barclays Capital

the former leaves the investor with more flexibility in terms of having the ability to sell the asset prior to maturity.

In Germany, there are two non-liquid instruments, Schuldscheindarlehen (promissory notes) and Namensschuldverschreibungen (registered bonds), which fall in the loans and receivables category under IAS 39. In other countries, namely Austria, Denmark, France, Ireland, Luxembourg, Norway, Sweden and the UK, issuers also make use of these products. An important criterion is that these assets are not listed on an exchange in order to ensure that there is no active market under the definition of IAS 3919_{. The documentation of these}

products is straightforward. It basically contains the names of the two parties, the principal amount, the interest rate, the coupon payment dates, the maturity date, call and/or assignment terms and the governing law. This rather simple documentation is possible as these types of instruments are embedded in a rigorous legal framework. A pre-condition to selling these products to investors is the formation of an appropriate infrastructure. Documentation has to be handled, pricing requests for plain vanilla products have to be answered within a relatively short period of time (about 15 minutes) and the issuer should eventually also be prepared to handle repurchase requests for these instruments. In addition, the respective debt instruments are transferable. The issuer will be informed about a transfer of the respective loan certificate in order to ensure timely payments of cash flows. With the breakout of the financial markets crisis in mid-2007, regular issuers of AAA debt with important funding needs had a strong incentive to develop or enhance their activities with respect to their issuance in registered format. This is mainly because investors reduce potential pressure on reported mark-to-market losses, but also, from an issuer’s point of view, registered bonds and Schuldscheindarlehen have specific advantages: they can gain swift market access owing to limited documentation requirements while remaining very flexible in terms of market timing and the fixing of terms and conditions. In addition, issuers can raise funds with a high degree of discretion in an efficient manner owing to generally lower documentation costs and products that are more closely tailored to individual investor’s needs.

19 _{IAS39 AG71 describes what is understood under an active market. It says that a financial instrument is regarded as}

quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

Promissory notes and registered bonds fall into the loans and receivables category

Strong incentives for investors and issuers to make more use of registered bonds

The increasing need for registered AAA debt reflects well in the Pfandbrief market. Until Q3 02, the market share of registered Pfandbriefe was stable at slightly above 25%, but since Q4 02, it is has grown consistently and currently stands at 38.3%. This reflects not only the preparation for IAS 39.9, but also the fact that in particular, many insurance companies preferred to focus on this format, as investments in registered debt were an efficient tool for stabilising income statements in an environment that has been characterised by volatile interest rate developments and widening credit spreads.

The particular appetite of German insurance companies and pension funds for promissory notes and registered bonds could make a strong contribution to an issuer’s funding profile. According to the association of German insurance companies (GDV), the industries’ gross fee income amounted to €171.3bn in 2009. Life insurers, which as of YE 08 made up €686bn, or 59.2% of the total €1,160bn of investments, had total investments of €706.3bn at 30 September 2009. At this date, fixed income made up €614bn or 87% of the total. While government bonds made up only €19.1bn, or 2.7% of total investments, listed covered bonds made up €180.8bn, or 25.6%, and another €106.1bn, or 15.0%, consisted of loans to credit institutions.

Figure 57: Market share of registered Pfandbriefe is growing consistently

24% 26% 28% 30% 32% 34% 36% 38% 40% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Market share of registered Pfandbriefe Source: Bundesbank, Barclays Capital

Increasing appetite for registered AAA debt is reflected in the Pfandbrief market

Gross fee income of €171bn in 2009, suggests ongoing strong demand for registered bonds from German insurance companies