Moody’s has raised from “probable-high” to “high” the base case Timely Payment Indicator (TPI) for German mortgage Pfandbriefe because it considers that a bank restructuring law and recent changes to the Pfandbrief Act increase the likelihood of timely payments being made to investors following an issuer default.

The move, announced yesterday (Wednesday), aligns the mortgage Pfandbrief TPIs with those assigned to German public sector backed Pfandbriefe.

Moody’s attributed the change to strong legislative and regulatory support provided to Pfandbriefe, and robust liquidity levels that have supported the covered bonds during the crisis.

“The strong legislative and regulatory support has been evidenced in a series of recent changes to the Pfandbrief act, which, taken together improve the likelihood that timely payments will be made to covered bond investors following the default of the bank supporting the covered bonds,” said Moody’s.

It highlighted three changes: the preferential treatment of Pfandbrief investors under bank restructuring legislation that came into effect January 2011, added powers for the cover pool administrator (Sachwalter) after its appointment, and the requirement for Pfandbrief issuers to maintain a 180-day liquidity buffer.

The rating agency noted that the Restructuring Act states that no measures taken on an issuing bank, including a bail-in of its senior unsecured creditors, may affect the cover pool, over which Pfandbrief investors have a preferential claim.

With respect to the Sachwalter, Moody’s said that its ability to raise finance from the cover pool has improved, for example because it can access repo facilities with the central bank system. Amendments to the Pfandbrief Act passed in 2010 clarified the status of a Pfandbriefbank in a stress scenario, granting bank status to the cover pool in a bid to facilitate liquidity management.

The requirement that issuers maintain a liquidity buffer of at least 180 days should help prevent liquidity shortfalls for a period, added Moody’s, granting the Sachwalter sufficient time to create the necessary liquidity by using powers such as its ability to enter into repo with the central bank or enter into loan agreements.

“Moody’s also notes that mortgage Pfandbriefe have been one of Europe’s most liquid financial instruments over the crisis to date,” it said. “A deep covered bond market improves the chances that timely payments on covered bonds will be made following the default of the bank supporting the covered bond.”

Moody’s raised the TPI from “probable-high” to “high” for 17 mortgage Pfandbriefe and raised to “probable-high” the TPI assigned to Deutsche Pfandbriefbank (pbb) mortgage Pfandbriefe. It maintained the TPI of SEB mortgage Pfandbriefe at “probable-high” because the composition of the cover pool could change following the sale of the bank’s retail business.

The Pfandbriefe that had their TPIs raised by Moody’s are issued by the following 17 banks: Bayerische Landesbank, Berlin-Hannoversche Hypothekenbank, Deutsche Bank, Deutsche Hypothekenbank, Deutsche Kreditbank, Deutsche Postbank, Eurohypo, Hamburger Sparkasse, HSH Nordbank, ING-DiBa, Kreissparkasse Koeln, LBBW, Landesbank Berlin,

Münchener Hypothekenbank, Norddeutsche Landesbank GZ (non-grandfathered mortgage Pfandbriefe), Sparkasse KoelnBonn, and Unicredit Bank.