Standard & Poor’s cut Dexia Kommunalbank Deutschland’s public sector backed covered bonds from AA+ to AA- yesterday (Monday) because it understands that the issuer will manage its cover pool to target a lower rating than the maximum achievable.

Dexia Kommunalbank Deutschland

The Pfandbrief rating remains on CreditWatch negative because Dexia Crédit Local – of which Dexia Kommunalbank Deutschland (DKD) is considered a core entity by S&P – is on negative review, and also because S&P will be actively monitoring management of overcollateralisation, with adverse management potentially resulting in a negative rating action on the covered bonds.

S&P said that in recent months DKD has restructured the asset and liability profile of its covered bonds to reduce asset-liability mismatch (ALMM) risk.

“Although DKD aims for a low ALMM risk and is potentially able to support a higher rating on the covered bonds, we understand that, going forward, it intends to manage the cover pool at a level below the maximum achievable covered bond rating,” said the rating agency. “We understand that the overcollateralisation provided will remain close to the level currently provided, and thus only commensurate with a AA- rating, all else being equal.”

S&P said that although, with a Category 1 programme and “low” ALMM classification, DKD could achieve a covered bond rating up to seven notches higher than Dexia Crédit Local, it would require OC of 8.61% but the level as of 31 May was 7.33%, based on S&P’s adjusted reporting.

The rating agency said it aims to resolve the CreditWatch placement after that of Dexia Crédit Local and will take into account DKD’s track record of managing OC in line with the currently assigned ratings.