Corealcredit needs to increase the level of publicly committed overcollateralisation to maintain a triple-A rating of its public sector Pfandbriefe by Fitch, with the German bank feeling the impact of the rating agency’s negative expectations regarding sovereign ratings and a negative migration in the creditworthiness of exposure to German municipalities.

The rating agency yesterday (Thursday) affirmed public sector covered bonds issued by Corealcredit at AAA, but said that the affirmation is contingent upon the issuer raising to 10.6% or higher the percentage of overcollateralisation it publicly commits to maintain. According to Fitch, Corealcredit intends to do this by the end of July by adding new assets to the cover pool, and will accordingly update an OC commitment published on its website.

The issuer currently publicly commits to maintain OC of at least 5%, slightly more than the 4.7% that Fitch previously viewed as the nominal OC level supporting the covered bonds’ triple-A rating.

That level has been revised to 10.6%, which Fitch considers allows the cover pool to withstand AA stress levels and repay the covered bonds in time. In addition, the rating agency considers this level to be sufficient to achieve high recoveries should the covered bonds default, supporting a two notch uplift to a AAA rating.

“This is mainly due to the continuing downward trend in some sovereign ratings and a negative migration in the creditworthiness of the exposure to German municipalities,” said Fitch of the higher OC level. “Corealcredit does not intend to issue further bonds out of this programme and therefore the size of the cover pool has decreased continuously over the last years.”

Stricter correlation assumptions compared with Fitch’s last analysis increased the total portfolio concentration level for Corealcredit’s public sector cover pool, which features a relatively small number of borrowers, added the rating agency.

Rating Default Rate (RDR) and Rating Recovery Rate (RRR) assumptions have therefore deteriorated. Around 48% of the cover pool is directly exposed to or guaranteed by the German sovereign and federal states, according to Fitch.

As of the end of July Corealcredit’s cover pool will amount to Eu1.65bn, which compares with outstanding public sector covered bonds of Eu1.47bn, which will result in nominal OC of around 12.4%, said Fitch.

According to the issuer’s latest cover pool disclosure as of the end of Q1 2011, the next highest public sector exposure is to Austria, with 16.9%, followed by Spain and Hungary with 5.1%, Italy 3.8%, Greece 3.2%, France 2.4%, Poland 2.2%, and Switzerland 1.6%.

Bernd Volk, head of covered bond research at Deutsche Bank, calculated “mid-beta” exposure (to Belgium, Italy and Spain) as standing at 8.9% and “high beta” at 3.2% (Greece, Ireland and Portugal). As a percentage of overcollateralisation, “beta” exposure amounted to 201.3%, he said.

Many public sector Pfandbriefe have an “overwhelming” majority of German assets in their cover pools, he said, but “heterogeneity is enormous”.

“For public cover pools, highest exposure to mid and high beta countries as a percentage of OC is for Deutsche Genossenschafts-Hypothekenbank with 235%,” said Volk. “Deutsche Hypo follows at 222.6% with exposure to mid and high beta countries at Eu2.35bn and OC volume of Eu1.05 bn.”

Public sector Pfandbriefe issued by Deutsche Pfandbriefbank have the highest absolute volume of exposure to medium and high beta countries (Eu8.78bn) with a 201.7% ratio of exposure to OC, he added.