Pfandbrief issuers could use more non-EEA assets as cover after having come up with structures that ensure the priority rights of covered bondholders in countries such as the US, with NordLB taking advantage of these in the first aircraft Pfandbrief and Moody’s having been satisfied.

Germany’s Pfandbrief Act restricts to 10% in public and mortgage cover pools and 20% in ship and aircraft cover pools the proportion of assets that can be included from non-EEA countries where the preferential claim of Pfandbrief holders is not certain. This has limited the amount of non-EEA lending that Pfandbrief issuers can refinance through covered bond issuance.

Moody’s has reviewed what credit it should give such cover, and yesterday (Wednesday) said that it will give full value to US and Swiss assets in the cover pools of German covered bond transactions.

The rating agency said that in the case of the US, it had finalised an analysis of legal opinions and structural solutions – in terms of trust structures – proposed by issuers to mitigate legal risk associated with US assets.

“Following the analysis, Moody’s continues to incorporate the full value of US assets in its analysis for those transactions that have confirmed the execution of the above-mentioned structural solutions,” it said. “This applies to US assets in mortgage and public sector cover pools as well as in aircraft cover pools.

“US assets not benefitting from these structural solutions will not be given any value by Moody’s when assessing German covered bond transactions.”

Lufthansa jumbo jet en route to JFK, New York

Norddeutsche Landesbank (NordLB) is taking advantage of this in the first Flugzeugpfandbrief transaction, which it is preparing, with Moody’s saying in its pre-sale report that the bank has put in place a trust structure for all US assets whereby the issuer pledges the loans secured by aircraft mortgages to a security trustee as security for the issuer’s obligations to the covered bondholders.

“Moody’s has received legal comfort that this structure will retain priority of covered bondholders over other creditors, albeit that there is a risk of delays in collecting the claims,” it said.

US assets account for 24% of the cover pool at the outset, according to the rating agency. Moody’s said that for a further 9% of the cover pool the borrower is incorporated outside the EEA but the aircraft and mortgages are registered within an EEA country, thereby maintaining the priority of covered bondholders in case of enforcement of mortgages.

Moody’s noted that while the Pfandbrief Act would allow a further 20% of the cover pool to comprise non-EEA assets for which the priority right of covered bondholders is not assured, NordLB is not taking advantage of this. The rating agency said that were the issuer to include such assets in future without mitigating structural features it would assume that the relevant portion of the cover pool is written off.

(See separate article for more on NordLB’s aircraft Pfandbrief.)

In its release on the treatment of non-EEA assets, Moody’s said that it is satisfied that for Swiss assets covered bondholders’ rights are sufficiently protected. It is considering proposed mitigants with regard to Japanese assets and said that it will continue to incorporate their full value for its analyses for highly rated issuers.

However, the rating agency said that no German issuers are working on solutions for Canadian assets and that it will therefore not give any economic value to Canadian assets in any cover pool.

According to data from the Association of German Pfandbrief Banks (vdp), its members (which account for around 99% of Pfandbriefe outstanding, according to the association) had an aggregate Eu6.9bn of US mortgage assets in their cover pools as at the end of the first quarter, 2.75% of Eu251.3bn of total mortgage collateral. The vast majority, Eu6.3bn, was commercial real estate and only Eu572m residential.

Swiss mortgage cover was an aggregate Eu3.1bn, Japanese Eu394m, and Canadian Eu235m. Of Eu389bn of total public sector Pfandbrief cover, Eu2.7bn, less than 1%, was US collateral, while Swiss collateral was Eu4.6bn, Japanese Eu2bn, and Canadian Eu1.3bn.