Moody’s cut Hypothekenbank Frankfurt public sector Pfandbriefe from Aa2 to Aa3 on Friday because of a lack of sufficient overcollateralisation, with the issuer, formerly Eurohypo, not intending to increase OC to support the higher rating.

OC of the Hypothekenbank Frankfurt covered bonds stood at 10.4% as at 31 March, according to Moody’s, while the OC level consistent with a Aa2 rating is 12%.

“Moody’s understands that the issuer is not planning to increase the OC of its public sector covered bonds such that it could remain in line with the Aa2 rating,” said the rating agency. “With the actual OC, Moody’s expected loss modelling leads to a Aa3 rating.”

The minimum OC level consistent with a Aa3 rating is 5% (in present value terms).

Hypothekenbank Frankfurt, the former Pfandbrief issuer of the Commerzbank group, is being wound down to meet European Commission requirements linked to the lender’s bail-out.