Moody’s cut public sector covered bonds issued by Deutsche Pfandbriefbank (pbb) from Aaa to Aa1 and maintained the German’s bank’s mortgage covered bonds on review for downgrade on Friday after having lowered the rating of the issuer.

Moody’s downgraded pbb from A3 to Baa2 on Friday following a deterioration of its standalone credit assessment as result of concerns over the bank’s ability to recover after subdued business activity in 2012, its sensitivity to market confidence given a high reliance on wholesale funding, and its exposure to weaker euro-area countries.

However, Moody’s noted that pbb continues to benefit from seven notches of systemic support uplift, citing the expectation of “continued (implicit) commitment of the German government, as the sole owner of pbb, to further support Germany’s second largest covered bond issuer during times of persistent market disruption”.

As a result of the issuer downgrade to Baa2 and a Timely Payment Indicator (TPI) of “high”, the rating of pbb’s covered bonds is restricted to Aa1.The overcollateralisation (OC) of the cover pool of public sector covered bonds is 12.5%, consistent with the 8% target of the Aa1 rating.

Pbb’s mortgage covered bonds, which are already rated Aa1, were maintained on review for downgrade as the level of committed OC of their cover pool, a statutory 2%, is insufficient to meet the minimum 7.5% consistent with the Aa1 rating. Moody’s will take further action after pbb decides whether it will provide sufficient committed OC to maintain the mortgage covered bonds’ Aa1 rating.