S&P placed on negative review mortgage covered bonds issued by Deutsche Pfandbriefbank (pbb) yesterday (Wednesday), saying that they are not sufficiently overcollateralised to cover counterparty risk, but that the issuer is working hard to comply with new counterparty criteria by a January transition date.

According to S&P, the negative review of the AA+ rating of pbb’s mortgage covered bonds is driven by concerns over the level of collateralisation of the programme and its ability to address new counterparty risk criteria that would support their prevailing rating.

“Based on the currently available information,” said the rating agency, “we believe that bank account and commingling risk is currently not sufficiently covered by overcollateralisation to still achieve a seven-notch rating uplift above the BBB issuer credit rating.”

S&P began implementing updated criteria for assessing counterparty and supporting party risk in covered bonds in 12 July, but did not put pbb’s mortgage covered bond programme on review because the issuer presented an action plan that the rating agency felt would allow it to meet the updated criteria by a transition date, set for 11 January 2013.

Yesterday S&P noted that pbb is undertaking “strong efforts” to meet the new criteria by the transition date. However, it also said that currently there are insufficient mitigants available to cover in particular the programme’s exposure to bank account risk and commingling risk, and that pbb’s mortgage covered bonds were therefore put on CreditWatch Negative.

With regard to derivative risk, S&P said that pbb has confirmed that it has fully implemented the action plan in line with the rating agency’s new criteria.

It said that it is undertaking the review at this point to comply with European regulations, according to which it needs to update its rating opinion of certain programmes.

The rating action on pbb’s mortgage covered bonds came after S&P on 7 November put the issuer’s public sector Pfandbriefe on negative review as a result of uncertainties about whether the issuer would implement an action plan to address bank account and commingling risks by the January transition date.