Standard & Poor’s cut covered bonds issued by Dexia Lettres de Gage Banque, Dexia Kommunalbank Deutschland and Hypo Pfandbrief Bank International on Friday, the rating agency’s deadline for issuers to take action to address its updated counterparty criteria, and affirmed three other programmes.

The rating agency downgraded Dexia LdG Banque issuance from A- to BBB, Dexia Kommunalbank Deutschland Pfandbriefe from AA- to A, and Hypo Pfandbrief Bank International lettres de gage from AA to A-. The covered bonds are backed by public sector collateral.

The ratings of public sector and mortgage Pfandbriefe issued by Westdeutsche Immobilienbank were affirmed at A and AA, respectively, and public sector Pfandbriefe issued by Deutsche Pfandbriefbank were affirmed at AA+ after S&P concluded that bank account and commingling risk are sufficiently mitigated.

The rating actions follow S&P’s reviews of the programmes’ credit and cashflow information and implementation of its updated counterparty criteria framework, which entered into effect on 12 July. Issuers were given six months to react to the updated criteria before facing downgrades.

Dexia Kommunalbank’s public sector Pfandbriefe were cut because S&P considers that account bank and commingling risk is only mitigated by overcollateralisation to the point of allowing for a three notch uplift above the issuer credit rating of Dexia Crédit Local (DCL), which it rates BBB.

Under S&P’s framework for assessing asset-liability mismatch risk in covered bonds Dexia Kommunalbank’s covered bonds could be rated up to five notches higher than DCL, but S&P said that the issuer intends to manage the cover pool at a rating level below AA+.

“We understand that the overcollateralisation will remain close to the current level, which is only commensurate with an A rating, all else being equal,” it said.

The Pfandbriefe were kept on negative review, in line with the ratings of DCL.

The downgrade of Dexia LdG Banque’s issuance reflects S&P’s view that overcollateralisation is insufficient to mitigate account bank and commingling risk to achieve any rating uplift above the counterparty credit rating of DCL, and the rating agency’s understanding that, in line with Dexia Kommunalbank’s approach, Dexia LdG does not intend to increase the level of support to the cover pool, therefore eliminating any uplift above DCL’s rating for the lettres de gage.

In contrast to Dexia’s obligations foncières issuer, Dexia Municipal Agency, Dexia Kommunalbank and Dexia Lettres de Gage Banque are not being sold to another credit institution but will be managed in run-off mode without engaging in any new business.

Insufficient overcollateralisation was also behind the downgrade, by four notches, of Hypo Pfandbrief Bank International covered bonds, to a A- rating level incorporating a two notch uplift above the issuer credit rating. A maximum potential rating uplift of six notches would be possible under S&P’s criteria.

The rating agency said that the issuer has communicated that it would increase the level of overcollateralisation, and that the rating action takes into account the likely amount of the increase. The covered bond rating was moved from negative review to CreditWatch developing because of the planned overcollateralisation increase, which is due to happen before the end of the month.

“Based on cashflow data containing the added assets, we will confirm the rating level, which could still move due to the payment structure of the additional assets,” said S&P.