Standard & Poor’s cut public sector covered bonds issued by Dexia Kommunalbank from AAA to AA+ today (Thursday), because it last Wednesday downgraded the issuer’s parent, Dexia Crédit Local. Dexia MA covered bonds were not hit, however, because of new ownership.

Dexia Kommunalbank Deutschland

The Dexia Kommunalbank Pfandbriefe remain on CreditWatch negative, mirroring the status of Dexia Crédit Local’s rating, which was last Wednesday (28 March) lowered from BBB+ to BBB.

The rating agency yesterday (Wednesday) said that its downgrade of Dexia Crédit Local has not affected its view of the creditworthiness of Dexia Municipal Agency because its ownership will transfer to a new bank that will be part owned by the French government and public sector entity Caisse de Dépôts et Consignations.

The ratings of Dexia MA covered bonds (AAA) therefore remain unchanged, according to S&P.

The rating agency assesses Dexia Kommunalbank’s public sector covered bonds has having “low” asset-liability mismatch (ALMM) risk and has designated them a Category 1 programme. This means that the Pfandbriefe can be rated a maximum of seven notches higher than the relevant issuer credit rating, in this case Dexia Crédit Local.

All else remaining equal, a downgrade of Dexia Crédit Local would automatically result in Dexia Kommunalbank’s Pfandbriefe being cut, with S&P noting that an analysis of credit and cashflow risks and the level of overcollateralisation of the cover pool as of December 2011 shows “a difference between the available and target credit enhancement that, if not remedied, could result in a further downgrade of DKD’s OF [öffentliche Pfandbriefe] by up to two notches.”