Fitch downgraded Berlin-Hannoversche Hypothekenbank public sector Pfandbriefe by three notches yesterday (Monday), from AAA to AA-, to conclude a negative review it initiated in April because the issuer said it would not commit to overcollateralisation above the legal minimum.

Berlin Hyp

Berlin Hyp in April launched a public sector Pfandbrief buyback in connection with its plans to reduce OC levels to mitigate costs involved in meeting Fitch OC levels for its mortgage Pfandbriefe. These are rated AA+ by Fitch and Aa1 by Moody’s. The issuer on 19 April said it would be reducing OC in its public sector cover pool to 2%, as required by the Pfandbrief Act, plus “an additional buffer”. (For related coverage click here.)

Fitch yesterday said that it has changed its view on the level of OC it gives credit to for Berlin Hyp’s public sector Pfandbriefe, basing its analysis on a legal minimum OC of 0% nominal OC required by the Pfandbrief legislation after the issuer said it would not commit to any level of OC above the legal minimum. The rating agency also noted that Germany’s Pfandbrief law requires a minimum OC of 2% required on a stressed net present value (NPV) basis.

Fitch yesterday said that a level of 0% nominal OC only allows Berlin Hyp’s public sector Pfandbriefe to be rated AA- based on the issuer’s issuer default rating (IDR) of A+, with one notch uplift granted for superior recoveries in event of a default on the bonds.

“As a consequence, a downgrade of the issuer would likely result in a downgrade of the public sector Pfandbriefe,” added the rating agency.

The rating agency kept the Discontinuity Factor (D-Factor) at 7.3%, which in combination with Berlin Hyp’s IDR would allow the public sector Pfandbriefe to be rated up to AAA on a probability of default (PD) basis, but Fitch said that in its view the uncertainty on OC means that a rating above the issuer’s IDR on a PD basis cannot be achieved.

It noted that based on line-by-line data provided by Berlin Hyp, as of 30 June its public sector cover pool had decreased by 28.2% since the end of September 2011, with OC reducing from 13.7% to 7.4%.

“Despite the significant pool reduction the risk profile of the Berlin Hyp’s public sector covered bond programme in terms of credit risk and market risks is almost unchanged,” said Fitch, noting that it has calculated default rate and recovery rates for a triple-A scenario of 3.5% and 30.2%, respectively, compared with 3.3% and 35.6% in its analysis based on September 2011 data.

As of 30 June 2012, Berlin Hyp had Eu5.9bn public sector Pfandbriefe outstanding, secured by a cover pool of Eu6.4bn, according to Fitch.