Standard & Poor’s on Friday placed public sector covered bonds issued by Depfa ACS Bank on negative review in response to changes to the cover pool that were not followed by an increase in the level of overcollateralisation.

S&P rates the covered bonds AA, based on a maximum potential uplift of six notches from the issuer rating (BBB). This takes into account the rating agency’s classification of the programme as being in Category 2 with “low” asset-liability mismatch (ALMM) risk.

S&P said that a credit enhancement level of 7.78% would be commensurate with the assigned AA rating, but that the prevailing state of the cover pool did not provide this.

“Although we believe there are cover-pool-eligible assets available within Depfa Bank plc (the parent bank of Depfa ACS Bank) that could enable the issuer to manage overcollateralisation at a level that would be commensurate with the current AA ratings on the covered bonds, to date it has not done so,” said the rating agency. “Despite changes to the credit risk profile of the pool, the level of overcollateralisation has remained relatively stable and, in our opinion, is now no longer at a level that is commensurate with the assigned AA ratings on the covered bonds.”

S&P said that the placement on CreditWatch negative was based on a review of the characteristics of the cover pool and of cashflow information as of 30 June, and observed changes to the credit risk profile after the cut-off date.

The rating agency said that in order to resolve the CreditWatch it will discuss with the issuer planned management of overcollateralisation and it will review updated cover pool and cashflow information within the next 90 days. It will aim to assess whether the future management of overcollateralisation will be affected by European Commission approval of proposed restructuring plans for the Hypo Real Estate group, the parent of Depfa Bank.

“If available overcollateralisation were to remain below the level of credit enhancement which, in our view, would be commensurate with the current AA rating, we would expect to lower the ratings on the covered bonds by at least one, and – depending on the level of overcollateralisation in the pool – potentially multiple notches,” said S&P.

As at 30 June the nominal value of assets in the Depfa ACS cover pool stood at Eu32.4bn, with the nominal value of outstanding asset covered securities at Eu29.6bn, according to an investor report from the issuer. Exposure to debt from Germany ranked highest among the cover pool assets, at 28.4%, followed by exposure to US debt at 18%, Spain at 11.6%, Italy 6.1%, and Belgium and France at 5.6% each. There are no Greek assets in the cover pool, according to the report.