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Aircraft Pfandbrief – Innovation on the German Covered Bonds Market

Summary/Abstract: German mortgage banking has undergone fundamental changes in the last five years. After more than a hundred years of organizational specialisation, the decision was taken to abolish this restriction, thus allowing universal banks to issue covered bonds. Since 2009, German issuers – the first in the world – have been able to issue a new class of covered bond: Aircraft Pfandbrief. The change grew out of the visionary approach of the German legislature, supported by a very optimistic prognosis of investment development in the China and Singapore aviation markets over the next 15 years. The innovative character of Pfandbrief’s new class is to use a new category of coverage – credit claims secured through mortgaging aircraft. This category of mortgage requires specific knowledge of the aviation industry, particularly valuation methods specific to aircraft, in order to do bank-mortgage collateral valuations. Undoubtedly, the leading position of German banks in financing aircraft investment helps them significantly. A new class of Pfandbrief will also be a challenge for investors as they must be aware of their exposure to previously unknown risks.

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