Lloyds Bank GmbH (A3/NR/A+) is a 100% subsidiary of the ring-fenced part (Lloyds Bank, Bank of Scotland, A1/A+/A+) of Lloyds Banking Group (Lloyds Bank, A3/BBB+/A). This subsidiary of the bank has been active in mortgage lending in the Dutch market since 1999 (EUR16.5bn of mortgage loans vs. deposits of EUR2.2bn) and collecting deposits in the German market since 2009 (deposits of EUR12.7bn, loans of EUR0.9bn). It also conducts lending in Germany and collects deposits in the Dutch market, but effectively the German deposits fund the bulk of the Dutch mortgage lending.
Lloyds Bank GmbH received its Pfandbrief licence from Bafin, the German regulator, in June 2023, paving the way for it to issue Pfandbriefe. It is not the first foreign bank subsidiary to issue Pfandbriefe - for instance, Natixis and Santander Consumer both have programmes - and significant non-German assets are also common in German Pfandbriefe (particularly German CRE-backed mortgage covered bonds or German public sector covered bonds), but Lloyds Bank GmbHʼs deal is the first of its kind in a different way. This is the first issuer Pfandbrief instrument to fully fund a non-German portfolio. Moreover, it will become the first Pfandbrief issuer to fund a sizeable pool of non-German residential mortgages (100% Dutch).
Cover Pool: 100% Dutch mortgages (retail owner-occupied residential), current principal balance of EUR542mn. WA Loan to Value 58.2%; WA seasoning 33 months; WA remaining terms 321 months; average mortgage rate 1.41%; OC level of 5.5% (the German Pfandbrief legislation includes the legal requirement for the issuer to maintain 2% overcollateralisation (OC) on a stressed present value basis plus 2% OC on a nominal value basis). NPL 0%. The covered bond programme is Aaa rated by Moody’s. Furthermore, Moody’s TPI leeway of four notches offers very solid protection against possible issuer downgrades.
Moody’s collateral risk score (a measure of cover pool asset quality) assigns the Lloyds GmbH Pfandbrief programme the lowest (i.e, the best) collateral risk among all the German and Dutch mortgage covered bond programmes rated by Moody’s, with a 2.3% score.
Preferential regulatory treatment: Lloyds GmbH covered bonds appear in the Bafin list as 'European Premium covered bonds'. As such, Lloyds Bank GmbH mortgage Pfandbriefe will be eligible for preferential treatment under EU CRR, as is the case for other German legislative Pfandbriefe. Hence, issuance of covered bonds via German-based Lloyds Bank GmbH under the German covered bond law comes with the potential benefits of a favourable risk weight (10% under the standard methodology) and LCR treatment (Level 1B) as for covered bonds within the EU.
Pricing: The Lloyds GmbH 5Y covered bond was launched at asw+30bp (with a coupon of 2.791%) from IPTs in the 37bp area. The 3.4x final subscription ratio is the largest covered bond orderbook since the summer break and together with the high participation of credit accounts implies a solid starting point for the deal to perform in secondary.
In our view, the pricing of the Lloyds GmbH covered bond reflects the fact that Lloyds GmbH is a new issuer which will not be as frequent and recurrent as the main players in the Pfandbrief space (LLOYDS still plans to issue Pfandbrief and / or Dutch RMBS of c.EUR1-2bn per year), at least in the near term, with its curve staying less liquid than for example Commerzbank, which would be the floor spread at asw+22bp in the 5Y, As such, we see fair value for the forthcoming Lloyds GmbH deal at around asw+23/24bp, thus offering solid potential secondary performance vs. the issuance level.