Moody’s has placed on review for downgrade Aaa rated mortgage and public sector backed Pfandbriefe issued by Deutsche Hypothekenbank following a review in the same direction of the issuer’s short term rating last Thursday.

The rating agency yesterday (Tuesday) said that a short term rating of below Prime-1 may correspond to a long term rating of A3 or below. Moody’s rates Deutsche Hypothekenbank A1.

The review for downgrade of the issuer’s short term Prime-1 rating was driven by the higher downgrade potential expected for the bank’s senior unsecured debt and deposit ratings, Moody’s said in a statement on 13 October.

“Deutsche Hypothekenbank may face constraints for its senior unsecured funding requirements in adverse market conditions,” it said.

However, it acknowledged these could be mitigated by an integration of the issuer into NordLB’s group treasury options.

Moody’s said Deutsche Hypothekenbank had a higher than expected vulnerability to market movements, caused by a sizable derivative positions, weak risk adjusted earnings power, and sustained weak capitalisation and limited loss absorption capacity, which might result in the need for additional capital support in a deteriorating economic environment.

Moody’s said any downgrade of the issuer’s rating would negatively affect the covered bonds through its impact on both the expected loss method and the Timely Payment Indicator (TPI) framework.

The covered bonds may be capped at a level lower than Aaa if the issuer rating is cut to below A3 in the case of mortgage Pfandbriefe, and Baa1 in the case of public sector Pfandbrief. The mortgage Pfandbriefe have a TPI of “probable-high” and the public sector Pfandbriefe a TPI of “high”.

The rating agency noted that if the issuer were downgraded to below A3 value given to collateral may be limited where this is not considered “committed”.