Moody’s cut Berlin-Hannoversche Hypothekenbank public sector Pfandbriefe from Aaa to Aa1 today (Wednesday) after the issuer said it would reduce overcollateralisation towards the legal minimum to mitigate the costs of meeting OC requirements for its mortgage Pfandbriefe.

Berlin Hyp said that the move could lead to downgrades of the public sector Pfandbrief and simultaneously offered investors a way out by tendering for up to Eu3bn of the covered bonds.

Moodys’s said that the downgrade reflects the future levels of OC within the programme, which will be consistent with a Aa1 rating.

“Today’s rating action follows Berlin Hyp’s public announcement on 19 April 2012 that the level of overcollateralisation in their public sector Pfandbrief programme is expected to be close to the 2% statutory minimum in the future,” said the rating agency. “Under Moody’s expected loss analysis, the rating consistent with this level of overcollateralisation is Aa1, whereas the level of overcollateralisation necessary to support the Aaa rating is 7%.”

The rating agency noted that its rating action was not caused by a deterioration in the credit quality of the cover pool assets backing the covered bonds.

Fitch on Friday put the public sector Pfandbriefe on Rating Watch Negative.