Fitch cut the rating of lettres de gage publiques issued by Hypothekenbank Frankfurt International from A+ to A because the issuer has not provided a public OC statement in response to a higher breakeven OC level stemming from updated public sector covered bond criteria.

Fitch at the end of January rolled out revised criteria for the asset analysis of European public sector backed covered bonds, which led to an increase in the loss rate of the lettres de gage (LdG) cover pool in an A+ scenario – the covered bonds’ previous rating – from 5.2% to 12.2%.

This led to a higher breakeven overcollateralisation level, with Fitch noting that the issuer (HFI, ex-Eurohypo Lux) has not proposed any changes to its programme that would address this.

Fitch said that for covered bond programmes in run-down mode such as HFI’s the rating agency only gives credit in its analysis to a public overcollateralisation statement by the issuer. As HFI does not provide any, Fitch only takes into account a statutory 2% minimum overcollateralisation.

Although the Discontinuity Cap assigned to the programme remained unchanged at 4 (moderate risk) and would allow the covered bonds to be rated up to AAA, a statutory minimum OC of 2% is only consistent with a maximum rating of A, one notch above HFI’s issuer rating of A-.

The increased loss rate in the HFI LdG cover pool is due to a rise in the correlation assumptions between central and regional or local governments in each country and between central governments within the euro-zone, said the rating agency, and significant decreases in the recovery assumptions for sub-national entities in case of their default due to a sovereign default.

“HFI’s collateral pool is particularly adversely affected by these assumption changes with 16% of the total exposure comprising claims against public entities located in countries rated in the A rating category and below,” added Fitch.

Fitch also said that in a A scenario the agency calculated losses of 10.7%, and that the credit risk and the large open foreign exchange positions on the asset side, mainly in US dollars, were the main risk factors within the programme.

Fitch noted that 27% of HFI’s cover pool portfolio is exposed to the US sovereign, followed by UK and Canadian subnational entities, 19% and 9%, respectively.