Moody’s cut mortgage Pfandbrief programmes of Hypothekenbank Frankfurt and Deutsche Kreditbank (DKB) to Aa2 yesterday (Thursday) because the issuers, after being downgraded, did not increase the overcollateralisation of their cover pools to maintain the covered bonds’ Aa1 ratings.

Hypothekenbank Frankfurt covered bonds had already been cut from Aaa to Aa1 on 8 June, after a downgrade of the issuer, and put on negative review, as Moody’s said it was waiting for confirmation regarding the bank’s plans to increase cover pool OC in order to meet a 14% requirement (with 6% on a committed basis) consistent with a Aa1 rating.

Moody’s concluded the review by lowering the covered bonds’ rating yesterday, saying that Hypothekenbank Frankfurt decided not to increase the level of OC over the current 16.1%, with 2% on a committed basis.

Deutsche Kreditbank’s mortgage Pfandbriefe were cut from Aa1 to Aa2, after having been downgraded by one notch in December 2011 as a result of a downgrade of DKB’s parent, BayernLB. On that occasion, Moody’s kept the covered bonds on review while waiting to receive proposals related to the form and level of OC that DKB intended to maintain.

Yesterday’s rating action followed the confirmation that the issuer was not going to provide OC higher than the statutory 2%. Moody’s said that the maximum level achievable without committed OC is Aa2, so it downgraded the issuer’s covered bonds to that level. DKB currently provides 77% OC, with only 2% on a committed basis.