Fitch has downgraded from AAA to AA- public sector backed Pfandbriefe issued by Düsseldorfer Hypothekenbank because of increased loss expectations on the cover pool assets, with publicly committed to overcollateralisation levels no longer deemed sufficient for a triple-A rating.

The rating agency yesterday (Tuesday) also removed the rating from Rating Watch Negative.

It said that the increased loss expectations on the cover pool assets were due to a continuing downward trend in some sovereign ratings and a negative migration in the creditworthiness of exposure to German municipalities.

The issuer publicly commits to maintaining 13.2% overcollateralisation, which Fitch said is no longer sufficient to prevent a default in a double-A situation and to provide outstanding recoveries in a triple-A stress situation.

“In the agency’s updated default and cashflow analysis, this level of OC allows the cover pool to withstand A+ stresses and still repay the covered bonds in time,” said Fitch. “It further enables stressed recoveries from the cover pool, given a default of the covered bonds, to exceed 51% in a AA- scenario, allowing a one notch uplift from the covered bonds’ rating on a probability of default (PD) basis.”

In Fitch’s analysis, the level of overcollateralisation supporting a AA- rating for the issuer’s public sector Pfandbriefe stands at 12.8%.

The covered bond rating is based on an issuer default rating of BBB- for Düsseldorfer Hypothekenbank and a Discontinuity Factor (D-Factor) of 6.1%. This combination enables the Pfandbriefe to be rated up to AA on a PD basis, and up to AAA if the overcollateralisation taken into account by Fitch would be sufficient to sustain the respective stress scenario.

All else being equal, the rating of the public sector Pfandbriefe could be maintained at AA- if the issuer is rated at least BB, said Fitch, adding that the rating of the covered bonds is also dependent on Germany’s triple-A rating as around 43% of the cover pool is directly exposed to or guaranteed by the German sovereign and federal states.

Around 27% of the portfolio is exposed to non-triple-A rated countries. Fitch said that it has stress-tested the default of one such sovereign (representing 9.5% of the cover pool) and a significant increase in the default rate of the exposures located in that country, combined with a low stressed recovery rate on these defaulted assets, to simulate the potential impact that a sovereign default could have on the public sector entities located within that country.

“In a AA-default scenario, Fitch has calculated an expected credit loss of 8.5% on the cover pool,” it said.