Standard & Poor’s upgraded public sector covered bonds issued by Luxembourg’s Erste Europäische Pfandbrief- und Kommunalkreditbank from AA+ to AAA yesterday (Monday), with an improvement in the issuer’s “confidential” rating apparently behind the move. The rating is on negative outlook alongside the issuer and due to high exposure to US assets.

S&P put EEPK’s lettres de gage publiques on CreditWatch developing on 11 January, after it put Commerzbank on negative review, due to EEPK’s status in the German group. The rating agency said that an affirmation of Commerzbank’s rating could result in EEPK’s covered bonds being upgraded.

S&P’s release on EEPK yesterday made no reference to Commerzbank, with the rating agency only saying that the rating action follows its CreditWatch resolution of the confidential issuer rating of the bank.

However, S&P said that the covered bonds benefit from the maximum six notch uplift possible over the issuer rating based on EEPK’s programme categorisation of 2 and an asset-liability mismatch (ALMM) risk classification of “low”. These are the same as at the time S&P put EEPK’s covered bonds on CreditWatch developing, implying that the upgrade has come about as a result of a one notch improvement in the issuer’s confidential rating, to A-.

S&P said that because the AAA rating incorporates the maximum six notch uplift available, any downgrade of the issuer would directly affect its rating of the covered bonds.

The outlook on the covered bonds is negative, added the rating agency, because the outlook on the issuer’s rating is negative, and also to reflect a high country risk exposure to US based assets.

According to an EEPK presentation, as of 30 March 42% of its cover pool comprised US assets. The notional value of total cover pool assets was Eu4.538bn.