WestLB covered bonds are set to be transferred to Landesbank Hessen-Thüringen as part of a transfer of Eu40bn of liabilities to carry out a planned orderly break-up of WestLB, according to Moody’s, with RBS analysts noting that a merger of WestLB’s and Helaba’s cover pools is more likely than the WestLB collateral being held in a separate entity.

The rating agency referred to an announcement made by WestLB last Tuesday (19 June) that major obstacles to the planned orderly breakup of the bank have been cleared, and said that disposition of WestLB’s assets and liabilities will most likely proceed in line with an agreement reached in June last year.

This involves most of WestLB’s assets and liabilities being transferred either to Landesbank Hessen-Thüringen (Helaba) or to Erste Abwicklungsanstalt (EAA), the wind-down entity of WestLB.

Other assets and liabilities will remain in a rump entity succeeding WestLB, a non-bank service provider that as of 1 July will be known as Portigon Financial Services (Portigon AG).

Moody’s said that it expects all covered bonds and the portion of senior unsecured debt and deposits that represents funds provided by savings banks and their clients, totalling Eu40bn, to be transferred to Helaba, which it said has emerged as one of the strongest of the Landesbanks.

RBS analysts said that the most likely outcome in their view is a merger of WestLB’s and Helaba’s cover pools, rather than WestLB’s cover pool being held in a separate entity.

“In our opinion, a confirmation that the pools are merged would be spread positive for WestLB’s outstanding public sector Pfandbriefe currently trading at considerable spread pick-ups over Helaba’s covered bonds,” they said.

WestLB’s subsidiary WestImmo, in turn, was initially supposed to be sold by 30 June 2012 but is expected to be transferred to EAA on 1 July, noted the analysts, with the transfer intended to facilitate the sale of the entity at a later stage.

They said that the issuer has previously stated that it will continue to manage its cover pool in line with rating agency and regulatory requirements, and that they expect only a mildly positive spread reaction, in particular for shorter dated WestImmo Pfandbriefe, given that the transfer is only intended to be temporary.

However, functioning access to funding via Pfandbriefe is an important argument in efforts to sell the bank, they said.

Moody’s said the break-up plan of WestLB is credit positive for the bank’s senior bondholders because they can expect to have their exposure safeguarded by an entity with a stronger credit profile. However, they said that the bank’s rescue, break-up and unwinding have several important implications beyond the immediate effects for investors.

“The WestLB case has shown that Germany’s Landesbanks are considered systemically important, demanding full support for senior bondholders even if the costs are great and the bank’s future (and jobs) are forfeited under pressure from anti-trust authorities in Brussels,” said the rating agency. “The case also shows that there are limits to the support that the mutually supportive Sparkassen-Finanzgruppe is prepared to provide.”

This is because the total costs of WestLB’s unwinding were not shared pro rata by the bank’s owners because respective costs exceeded the financial capacity of the stake-holding regional savings banks, according to Moody’s. As a result the central government stepped in and contributed Eu3bn to the package instead of the Sparkassen-Finanzgruppe.

“This is significant for taxpayers and bondholders, since future support actions of a large scale may once again go beyond the sector’s capacity and control, leaving it to the central government to decide on burden-sharing,” said Moody’s.