Fitch cut public sector covered bonds issued by Hypothekenbank Frankfurt International, the former Eurohypo Luxembourg, from AAA to A+ this (Friday) morning because it has made no public OC commitment and the legally required level falls well short of that required to maintain the previous rating.

The lettres de gage publiques were put on Rating Watch Negative on 12 September upon the implementation of Fitch’s updated covered bond rating methodology given that the rating agency’s analysis no longer supported the AAA rating. The conclusion to the review came after HFI did not propose any changes to it programme that would address the drivers of the downgrade, Fitch said.

“HFI’s covered bond programme is in a run-down mode and according to its updated criteria, the agency only gives credit in its analysis to a public OC statement by the issuer,” it said. “As HFI has no such public statement in place, Fitch only takes into account the legal minimum of 2%.

“This level of OC allows for high recoveries in the agency’s A+ scenarios, hence the LdGP can be rated two notches above the issuer’s IDR of A-. The AAA rating could be maintained, if the issuer publicly stated an OC level of 19.4%.”

The programme has a Discontinuity Cap (D-Cap) of 4, “moderate risk”. Fitch said that the A+ rating would be vulnerable if the issuer rating were downgraded to BBB+ or lower. The issuer is on stable outlook and this drives a stable outlook on the covered bonds, it said.