S&P yesterday (Wednesday) placed on negative review public sector covered bonds issued by Deutsche Pfandbriefbank because, after a reassessment, it is now uncertain that the issuer will take action to address bank account and commingling risks to defend the covered bonds’ seven notch uplift from the issuer rating, said the rating agency.

S&P rates Deutsche Pfandbriefbank (pbb) public sector covered bonds AA+. Under new criteria on counterparty risk in covered bonds, effective in 12 July, the rating agency gave issuers six months to demonstrate that their covered bond programmes would fulfil its criteria, and yesterday said that it had initially concluded that pbb’s action plan would do this.

However, it yesterday placed the covered bonds on CreditWatch negative after reassessing the likelihood that pbb, rated BBB, will implement its action plan to fully meet S&P’s new criteria by 11 January 2013, the transition date to the criteria.

“In particular, we are uncertain that the action plan will sufficiently address bank account and commingling risks,” said S&P, adding that the CreditWatch negative placement also reflects its review of the cover pool characteristics and cashflow information (as of 30 June) in the programme and its assessment of the counterparty risk.

“With regard to bank account risk and commingling risk,” said S&P, “we have reviewed the available credit enhancement and the covered bonds’ target credit enhancement to maintain the AA+ rating based on daily cashflow data that we received from the issuer.

“Based on this information, as well as discussions we have held with the issuer, we now believe it uncertain whether the issuer will elect to address these risks by adding further enhancements to still achieve a seven notch rating uplift above the BBB issuer credit rating.”

S&P said that the resolution of the negative review will depend on the extent to which pbb decides to take remedial action that will enable the programme to meet the rating criteria by the transition date.

If the rating agency does not consider that the relevant counterparty risk has been addressed it could lower the rating by up to seven notches, removing any uplift from the issuer credit rating, it said.

“Under this latter scenario, should Deutsche Pfandbriefbank issue short term public sector covered bonds, the rating would also be floored at that of the issuer,” it added.