At his farm in Huelva, a hilly province in southwestern Spain,
Gerhard Bruckermann will soon harvest his first crops of neem and
moringa, exotic plants native to India and known to cognoscenti for
their medicinal qualities. "These are underutilized plants, and I
would like to increase their acceptance," says the chief of DePfa
Bruckermann, 55, is wielding a green thumb in the financial
world as well these days. He's nurturing a variation of a German
financial product, the Pfandbrief, in Ireland and trying to
sell it to a broad cross-section of European buyers. He hopes that
it will also take root on U.S. and Asian soil.
Bruckermann runs a bank that is itself a kind of transplant.
DePfa was spun off last year from Deutsche Pfandbriefbank,
Germany's leading issuer of Pfandbriefe, high-quality bonds secured
by a pool of assets, usually mortgages or loans to public sector
borrowers. The 81-year-old Deutsche Pfandbriefbank, a onetime
government lender, split itself into Bruckermann's DePfa Bank, a
public finance specialist with E150 billion ($178.6 billion) in
assets, and Aareal Bank, a Wiesbaden-based mortgage and property
group with E37.3 billion in assets.
In a switch many German bank CEOs would have envied, DePfa moved
its headquarters and about 120 of its 350-member staff to
tax-friendly Dublin, where new laws allow the issuance of a
Pfandbrief clone, the asset-covered security. The bank's shares are
still listed in Frankfurt, and it maintains a sizable business in
Germany, but thanks to its new Dublin headquarters, DePfa can
distance itself from the many problems stifling German banks.
Bruckermann's goal is to transform DePfa from a solid domestic
player into a global leader in public sector financing. At present
the cost-conscious bank has three main business lines: It lends
money to public entities ranging from national governments to
municipalities and refinances the loans by issuing Pfandbriefe or
asset-covered securities; it provides investment banking advice to
governments on their financing alternatives; and it finances
infrastructure projects overseen by governments. Double-A-rated
DePfa maintains a very conservative balance sheet on which more
than 75 percent of its assets carry a zero risk weighting under
international banking regulations. Major clients include the
Treasuries of Germany and Italy.
Bruckermann aims to diversify DePfa's German lending and
borrowing base throughout Europe and strengthen its toehold
overseas. Says he, "We're trying to take the powerful business
model we have here on the road." Aside from selling its euro-based
Pfandbriefe and asset-covered securities to U.S. and Japanese
buyers, DePfa is eyeing other niches in those countries: offering
liquidity and credit enhancement to public borrowers and creating
bigger dollar- and yen-denominated Pfandbrief markets.
For the moment, Bruckermann is expanding his bank under
near-ideal conditions. With public entities from Madrid to Tokyo
facing budgetary pressures, the services of a well-heeled financier
are in demand. Declining rates have spurred additional desire for
financing (and refinancing) and given the interest-sensitive bank a
healthy spread. What's more, with the dollar declining, DePfa's
euro-based products are enjoying newfound interest.
In February the bank made a bold move: It issued the first
asset-covered securities under recently passed Irish legislation
designed to lure some of the E400 billion market in Pfandbriefe and
related bonds to Dublin. The triple-A-rated issue, secured by a
broad portfolio of loans to public borrowers in Austria, Belgium,
Finland, France, Germany, Greece, Italy, the Netherlands and Spain,
drew strong international interest. Demand was sufficient to raise
the amount offered to E5 billion from E4 billion. "After this it
doesn't matter if the bond is issued in Dublin or Frankfurt,"
Bruckermann says. Indeed, in late May DePfa returned to market with
a second Irish asset-covered security offering, for E3.5 billion.
As a result, the bank has already exceeded its E8 billion forecast
for asset-covered security issuance this year.
DePfa's numbers tell the story. In mid-May the bank posted
first-quarter net profits of E83 million, a 43 percent year-on-year
gain; revenues rose to E144 million, a 31 percent jump. Bruckermann
told analysts that the bank might exceed its 2003 profit forecast
of E250 million -- E300 million, he said, isn't out of reach. Since
late February shares of DePfa, whose portfolio lacks exposure to
Germany's swooning stock market, have doubled, to about E58.
Bruckermann certainly runs an efficient operation. DePfa's
cost-income ratio is about 30 percent, roughly 5 percentage points
lower than those of European rivals like Germany's Eurohypo and
Paris-based Dexia Group, a financial services conglomerate composed
of Belgian, French and Luxembourger institutions. That ratio is
less than half that of the typical German bank.
"Most banks are concentrating on managing down costs because
their ability to significantly grow revenue is constrained," says
Leslie Mapondera, a bank analyst at Credit Suisse First Boston.
"DePfa's cost management compares favorably with other banks in the
sector, and from a revenue perspective, public sector financing is
a growing area. DePfa's issuance of public sector debt (which
totals E55 billion) has been growing rapidly, so it's well placed
from a revenue standpoint, too."
DePfa must overcome some doubts. Interest rates won't stay low
forever, and that fact raises questions about the bank's ability to
thrive in less hospitable circumstances. And even if favorable
operating conditions persist, DePfa faces serious competition.
Smaller, local banks are vying for Pfandbrief-type business in
Europe, and both Dexia and Eurohypo compete vigorously with DePfa
all over the world. Both have already moved into the U.S. Giant
banks like J.P. Morgan Chase & Co. and WestLB dominate public
financerelated lending in the U.S., where a handful of financial
guarantors are well entrenched. Japan, though desperate for
liquidity, is still a notoriously difficult marketplace for foreign
Bruckermann, who joined Deutsche Pfandbriefbank to run its
public finance business in 1991, just after it was privatized,
views the initial Irish ACS sales as the handsome payoff for
several years of work to establish a solid European base for
DePfa's international ambitions. He first presented the idea of a
spin-off to the board in the summer of 2000. It wasn't an easy
sell. "At the time, everybody thought strategically about mergers
and economies of scale, and here was a small, specialist bank
splitting even more," he recalls. To Bruckermann, however, smaller
means faster. "We have the speed of decision making of a smaller,
private bank combined with the muscle of a larger institution. If
you need 5 to 10 billion euros' financing next week without
spreading it around the market, we can do it." In October 2001 the
board and DePfa's major investors -- German and Swiss banks and
insurers -- approved the spin-off, which happened in July 2002.
In its bid to expand beyond Germany, DePfa found a willing
partner in the Irish government, which had been keen to lure a
portion of the Pfandbrief market to Dublin. In December 2001 the
government passed comprehensive legislation giving investors in
asset-covered securities first claim on assets in a bankruptcy and
setting stringent quality guidelines for issuing banks. The law
also grants issuers like DePfa much greater flexibility in selling
asset-covered securities. In Germany, for instance, 90 percent of a
Pfandbrief's underlying loans must come from Austrian, French,
German or Luxembourger borrowers; Ireland allows the underlying
loans to originate anywhere in the European Economic Area, and 15
percent may come from non-European Group of Seven countries.
Expansion of DePfa's lending programs into the U.S. or Japan or
even further into emerging Europe would have been difficult, if not
impossible, under the restrictive German rules.
Bruckermann acknowledges another advantage of his new home: He's
not running a German bank. Plagued by regulation, a weak economy
and chronically low margins, German institutions have lost favor
with investors everywhere, and their woes have begun to infect the
Pfandbrief market. In early April Moody's Investors Service
downgraded a mortgage-backed Pfandbrief issued by HVB Real Estate
Bank because of concerns about its parent, HVB Group, the country's
second-largest private sector bank.
The gregarious Bruckermann, who was born in Solingen and lives
in London with his American wife and three children, is eager to
emphasize that more than his bank's address is different: "Our
corporate governance has changed from the German model to the
Anglo-American model," he says. Nonexecutive members now hold a
majority on the DePfa board, and the company adheres to the U.S.'s
generally accepted accounting principles.
DePfa has benefited from a number of positive developments
beyond Germany's borders -- not least, legal changes in many
countries that, like Ireland, have given investors greater powers
to seize assets if problems occur. France, Luxembourg and Spain
have already created rapidly growing marketplaces for equivalent
vehicles known as obligations foncières, lettres de
gage and cédulas hipotecarias, respectively.
"With the establishment of other liquid covered bond product has
come diversification away from German names with similar credit
risks," says Martin Keutner, the executive director responsible for
German debt capital markets at UBS Warburg. "Within the asset class
there is a much broader differentiation than this market was used
to a few years ago."
The diversification of credit ratings also appeals to investors.
Pfandbriefe historically were "a pure triple-A asset class," notes
Keutner. That changed when issues outside Germany, particularly in
Spain, reached the market with lower ratings. Then came the German
banks' credit crisis, which created spread differentials.
Ironically, some investors who bought non- German deals because
they were weaker credits with higher yields are now looking outside
Germany to find stronger credits.
Sales of jumbo Pfandbriefe -- larger issues (including
asset-covered securities) of at least E500 million, first offered
in 1995 to attract big institutional investors -- reflect the
market's diversification. Jumbo issuance climbed to E48.4 billion
this year through April, compared with E71.3 billion for all of
2002, according to Bondware, which tracks deal volume. (Bondware is
a unit of Euromoney Institutional Investor.) Significantly, half of
the 2003 issuance has taken place outside Germany, versus one third
WILL DEPFA'S APPROACH ATTRACT U.S. and Japanese investors?
Analysts believe that the expansion can work if the bank doesn't
forsake its cost-efficient style. International growth "makes sense
where market entry costs are relatively low and the diversity of
the bank's loan and business portfolio is improved," says CSFB's
Although DePfa has kept an office in New York since 1998, only
last month did it receive a banking agency license to ramp up its
operations there. The goal, explains Herbert Jacobs, who heads
DePfa USA, is to offer public financing via loans and standby
repurchase agreements for bond insurers.
Although J.P. Morgan Chase and WestLB control the bulk of the
U.S. market for such financing, Jacobs sees an opening. The ranks
of bank lenders have thinned. The once-mighty Japanese have
departed, U.S. institutions have pulled back or merged, and some
European lenders no longer have the credit standing to lend
aggressively. There are fewer lenders today than in the 1980s, says
Meanwhile, there has been a surge in demand for credit.
California, for instance, is expected to run a budget deficit of
about $35 billion over the next 18 months. Notes Jacobs, "No one
public finance bank can commit sufficient enhancement facilities on
its own to fully meet California's funding needs."
DePfa is also committed to creating a U.S. market for
dollar-denominated Pfandbrief issues so that it can diversify its
own funding sources and expand name recognition for the security
worldwide. Dexia and Eurohypo have done dollar-based Pfandbriefe in
the past. Last year DePfa joined them by raising $2 billion.
DePfa believes that it can give U.S. investors an alternative to
the prevailing mortgage- and loan-backed securities from U.S.
agencies like the Federal Home Loan Mortgage Corp., the Federal
National Mortgage Association and the Student Loan Marketing
Association. "In the U.S. you have this huge agency market -- all
these Freddies, Fannies and Sallies. I've spoken to investors, and
they are all looking for diversity," says Wally Hoefer-Neder,
DePfa's head of global capital markets. "We are offering an
Bruckermann concedes that DePfa won't succeed in the U.S.
overnight. Still, he plans to take a similar tack in Japan, where
DePfa has had a rep office since 1995. The bank wants to build a
bigger domestic market in the yen-denominated issues that it sells
to the central bank as well as to Japanese funds, banks and
insurers. (It has already sold the equivalent of E7.5 billion in
Of course, Japan, where the national debt equals roughly 140
percent of GDP, offers fertile ground for any patient,
deep-pocketed lender. Here DePfa will focus on lending to and
advising government agencies, prefectures and metropolitan
authorities. "It's a good point in the pricing cycle, especially if
you have resources," says one banker. "If you don't see the
benefits" of expanding in Japan, says Bruckermann, "you shouldn't
be in this business."
Fair enough, but DePfa still must prove that it can manage a
global public finance business in a less favorable economic
climate. Even in last year's bull market for bonds, the bank had
E21 million in hedging-related losses. And as recently as five
years ago, the highly cyclical U.S. public finance business was in
tatters, with issuance off nearly 50 percent. Running a bank in
that kind of climate will surely test Bruckermann's green